UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JuneSeptember 30, 2011

Or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

 

 

 

Commission

file number

  

Exact name of registrants as specified in their

charters, addresses of principal executive

offices,

telephone numbers and states of incorporation

  

IRS Employer

Identification No.

1-32853  

DUKE ENERGY CORPORATION

550 South Tryon Street

Charlotte, NC 28202-4200

704-594-6200

State of Incorporation: Delaware

  20-2777218
1-4928  

DUKE ENERGY CAROLINAS, LLC

550526 South TryonChurch Street

Charlotte, NC 28202-4200

704-594-6200

State of Incorporation: North Carolina

  56-0205520
1-1232  

DUKE ENERGY OHIO, INC.

139 East Fourth Street

Cincinnati, OH 45202

704-594-6200

State of Incorporation: Ohio

  31-0240030
1-3543  

DUKE ENERGY INDIANA, INC.

1000 East Main Street

Plainfield, IN 46168

704-594-6200

State of Incorporation: Indiana

  35-0594457

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Duke Energy Corporation (Duke Energy)    Yes  x    No  ¨

Duke Energy Carolinas, LLC (Duke Energy Carolinas)    Yes  x    No  ¨

Duke Energy Ohio, Inc. (Duke Energy Ohio)    Yes  x    No  ¨

Duke Energy Indiana, Inc. (Duke Energy Indiana)    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Duke Energy    Yes  x    No  ¨

Duke Energy Carolinas    Yes  x    No  ¨

Duke Energy Ohio    Yes  x    No  ¨

Duke Energy Indiana    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Duke Energy Large accelerated filer  x Accelerated filer ¨
 Non-accelerated filer  ¨ Smaller reporting company ¨
Duke Energy Carolinas Large accelerated filer  ¨ Accelerated filer ¨
 Non-accelerated filer  x Smaller reporting company ¨
Duke Energy Ohio Large accelerated filer  ¨ Accelerated filer ¨
 Non-accelerated filer  x Smaller reporting company ¨
Duke Energy Indiana Large accelerated filer  ¨ Accelerated filer ¨
 Non-accelerated filer  x Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Duke Energy    Yes  ¨    No  x

Duke Energy Carolinas    Yes  ¨    No  x

Duke Energy Ohio    Yes  ¨    No  x

Duke Energy Indiana    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.

 

Outstanding as of

July 29,
November 4, 2011


Registrant

  

Description

  Shares 

Duke Energy

  Common Stock, par value $0.001   1,331,798,7901,332,733,321  

Duke Energy Carolinas

  All of the registrant’s limited liability company member interests are directly owned by Duke Energy.  

Duke Energy Ohio

  All of the registrant’s common stock is indirectly owned by Duke Energy.  

Duke Energy Indiana

  All of the registrant’s common stock is indirectly owned by Duke Energy.  

This combined Form 10-Q is filed separately by four registrants: Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana (collectively the Duke Energy Registrants). Information contained herein relating to any individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrants.

Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana meet the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format specified in General Instructions H(2) of Form 10-Q.

 

 

 


INDEX

FORM 10-Q FOR THE QUARTER ENDED JUNESEPTEMBER 30, 2011

 

   Page    Page 

PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

  

PART I. FINANCIAL INFORMATION

  
Item 1. Financial Statements   3   Financial Statements   3  
 Duke Energy Corporation (Duke Energy)   Duke Energy Corporation (Duke Energy)  
 

Unaudited Condensed Consolidated Statements of Operations

   3   

Unaudited Condensed Consolidated Statements of Operations

   3  
 

Unaudited Condensed Consolidated Balance Sheets

   4   

Unaudited Condensed Consolidated Balance Sheets

   4  
 

Unaudited Condensed Consolidated Statements of Cash Flows

   6   

Unaudited Condensed Consolidated Statements of Cash Flows

   6  
 

Unaudited Condensed Consolidated Statements of Equity and Comprehensive Income

   7   

Unaudited Condensed Consolidated Statements of Equity and Comprehensive Income

   7  
 Duke Energy Carolinas, LLC (Duke Energy Carolinas)   Duke Energy Carolinas, LLC (Duke Energy Carolinas)  
 

Unaudited Condensed Consolidated Statements of Operations

   8   

Unaudited Condensed Consolidated Statements of Operations

   8  
 

Unaudited Condensed Consolidated Balance Sheets

   9   

Unaudited Condensed Consolidated Balance Sheets

   9  
 

Unaudited Condensed Consolidated Statements of Cash Flows

   11   

Unaudited Condensed Consolidated Statements of Cash Flows

   11  
 

Unaudited Condensed Consolidated Statements of Member’s Equity and Comprehensive Income

   12   

Unaudited Condensed Consolidated Statements of Member’s Equity and Comprehensive Income

   12  
 Duke Energy Ohio, Inc. (Duke Energy Ohio)   Duke Energy Ohio, Inc. (Duke Energy Ohio)  
 

Unaudited Condensed Consolidated Statements of Operations

   13   

Unaudited Condensed Consolidated Statements of Operations

   13  
 

Unaudited Condensed Consolidated Balance Sheets

   14   

Unaudited Condensed Consolidated Balance Sheets

   14  
 

Unaudited Condensed Consolidated Statements of Cash Flows

   16   

Unaudited Condensed Consolidated Statements of Cash Flows

   16  
 

Unaudited Condensed Consolidated Statements of Common Stockholder’s Equity and Comprehensive Income (Loss)

   17   

Unaudited Condensed Consolidated Statements of Common Stockholder’s Equity and Comprehensive Income (Loss)

   17  
 Duke Energy Indiana, Inc. (Duke Energy Indiana)   Duke Energy Indiana, Inc. (Duke Energy Indiana)  
 

Unaudited Condensed Consolidated Statements of Operations

   18   

Unaudited Condensed Consolidated Statements of Operations

   18  
 

Unaudited Condensed Consolidated Balance Sheets

   19   

Unaudited Condensed Consolidated Balance Sheets

   19  
 

Unaudited Condensed Consolidated Statements of Cash Flows

   21   

Unaudited Condensed Consolidated Statements of Cash Flows

   21  
 

Unaudited Condensed Consolidated Statements of Common Stockholder’s Equity and Comprehensive Income

   22   

Unaudited Condensed Consolidated Statements of Common Stockholder’s Equity and Comprehensive Income

   22  
 Combined Notes to Unaudited Condensed Consolidated Financial Statements for Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana   23   Combined Notes to Unaudited Condensed Consolidated Financial Statements for Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana   23  
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   82   Management’s Discussion and Analysis of Financial Condition and Results of Operations   89  
3. Quantitative and Qualitative Disclosures About Market Risk   98   Quantitative and Qualitative Disclosures About Market Risk   105  
4. Controls and Procedures   98   Controls and Procedures   105  

PART II. OTHER INFORMATION

PART II. OTHER INFORMATION

  

PART II. OTHER INFORMATION

  
1. Legal Proceedings   99   Legal Proceedings   106  
1A. Risk Factors   99   Risk Factors   106  
2. Unregistered Sales of Equity Securities and Use of Proceeds   99   Unregistered Sales of Equity Securities and Use of Proceeds   106  
4. Submission of Matters to a Vote of Security Holders   99  
6. Exhibits   100   Exhibits   107  
 Signatures   101   Signatures   109  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements, which are intended to cover Duke Energy and the applicable Duke Energy Registrants, are identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will,” “potential,” “forecast,” “target,” “guidance,” “outlook” and similar expressions. Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

 

State, federal and foreign legislative and regulatory initiatives, including costs of compliance with existing and future environmental requirements, as well as rulings that affect cost and investment recovery or have an impact on rate structures;

 

Costs and effects of legal and administrative proceedings, settlements, investigations and claims;

 

Industrial, commercial and residential growth or decline in the respective Duke Energy Registrants’ service territories, customer base or customer usage patterns;

 

Additional competition in electric markets and continued industry consolidation;

 

Political and regulatory uncertainty in other countries in which Duke Energy conducts business;

 

The influence of weather and other natural phenomena on each of the Duke Energy Registrants’ operations, including the economic, operational and other effects of storms, hurricanes, droughts and tornados;

 

The impact on the Duke Energy Registrants’ facilities and business from a terrorist attack;

 

The inherent risks associated with the operation and potential construction or nuclear facilities, including environmental, health, safety, regulatory and financial risks;

 

The timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates;

 

Unscheduled generation outages, unusual maintenance or repairs and electric transmission system constraints;

 

The performance of electric generation facilities and of projects undertaken by Duke Energy’s non-regulated businesses;

 

The results of financing efforts, including the Duke Energy Registrants’ ability to obtain financing on favorable terms, which can be affected by various factors, including the respective Duke Energy Registrants’ credit ratings and general economic conditions;

 

Declines in the market prices of equity securities and resultant cash funding requirements for Duke Energy’s defined benefit pension plans;

 

The level of creditworthiness of counterparties to Duke Energy Registrants’ transactions;

 

Employee workforce factors, including the potential inability to attract and retain key personnel;

 

Growth in opportunities for the respective Duke Energy Registrants’ business units, including the timing and success of efforts to develop domestic and international power and other projects;

 

Construction and development risks associated with the completion of Duke Energy Registrants’ capital investment projects in existing and new generation facilities, including risks related to financing, obtaining and complying with terms of permits, meeting construction budgets and schedules, and satisfying operating and environmental performance standards, as well as the ability to recover costs from ratepayers in a timely manner or at all;

 

The effect of accounting pronouncements issued periodically by accounting standard-setting bodies;

 

The expected timing and likelihood of completion of the proposed merger with Progress Energy, Inc. (Progress Energy), including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed merger that could reduce anticipated benefits or cause the parties to abandon the merger, the diversion of management’s time and attention from Duke Energy’s ongoing business during this time period, the ability to maintain relationships with customers, employees or suppliers as well as the ability to successfully integrate the businesses and realize cost savings and any other synergies and the risk that the credit ratings of the combined company or its subsidiaries may be different from what the companies expect;

 

The risk that the proposed merger with Progress Energy is terminated prior to completion and results in significant transaction costs to Duke Energy; and

 

The ability to successfully complete merger, acquisition or divestiture plans.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Duke Energy has described. The Duke Energy Registrants undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 


PART I. FINANCIAL INFORMATION

DUKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per-share amounts)

Item 1. Financial Statements

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011   2010 2011   2010   2011 2010 2011   2010 

Operating Revenues

             

Regulated electric

  $2,576    $2,531   $5,149    $5,156    $3,016   $3,077   $8,165    $8,233  

Non-regulated electric, natural gas, and other

   864     670    1,719     1,368     867    791    2,586     2,159  

Regulated natural gas

   94     86    329     357     81    78    410     435  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Total operating revenues

   3,534     3,287    7,197     6,881     3,964    3,946    11,161     10,827  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Operating Expenses

             

Fuel used in electric generation and purchased power—regulated

   834     789    1,646     1,608     957    990    2,603     2,598  

Fuel used in electric generation and purchased power—non-regulated

   388     282    764     560     383    335    1,147     895  

Cost of natural gas and coal sold

   63     46    214     236     48    36    262     272  

Operation, maintenance and other

   959     944    1,839     1,843     866    881    2,705     2,724  

Depreciation and amortization

   437     426    891     882     455    447    1,346     1,329  

Property and other taxes

   169     163    355     356     183    182    538     538  

Goodwill and other impairment charges

   9     656    9     656     300    44    309     700  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Total operating expenses

   2,859     3,306    5,718     6,141     3,192    2,915    8,910     9,056  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Gains on Sales of Other Assets and Other, net

   4     5    14     7  

(Losses) Gains on Sales of Other Assets and Other, net

   (5  2    9     9  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Operating Income (Loss)

   679     (14  1,493     747  

Operating Income

   767    1,033    2,260     1,780  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Other Income and Expenses

             

Equity in earnings of unconsolidated affiliates

   48     36    80     65     43    21    123     86  

Gains on sales of unconsolidated affiliates

   12     —      14     —    

(Losses) gains on sales of unconsolidated affiliates

   (3  (1  11     (3

Other income and expenses, net

   97     88    214     179     83    116    297     297  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Total other income and expenses

   157     124    308     244     123    136    431     380  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Interest Expense

   203     212    422     422     213    202    635     624  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Income (Loss) From Continuing Operations Before Income Taxes

   633     (102  1,379     569  

Income From Continuing Operations Before Income Taxes

   677    967    2,056     1,536  

Income Tax Expense from Continuing Operations

   192     116    425     342     208    301    633     643  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Income (Loss) From Continuing Operations

   441     (218  954     227  

Income From Continuing Operations

   469    666    1,423     893  

Income From Discontinued Operations, net of tax

   —       1    —       1     1    —      1     1  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Net Income (Loss)

   441     (217  954     228  

Less: Net Income Attributable to Noncontrolling Interests

   6     5    8     5  

Net Income

   470    666    1,424     894  

Less: Net (Loss) Income Attributable to Noncontrolling Interests

   (2  (4  6     1  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Net Income (Loss) Attributable to Duke Energy Corporation

  $435    $(222 $946    $223  

Net Income Attributable to Duke Energy Corporation

  $472   $670   $1,418    $893  
  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Earnings Per Share—Basic and Diluted

             

Income (loss) from continuing operations attributable to Duke Energy Corporation common shareholders

       

Income from continuing operations attributable to Duke Energy Corporation common shareholders

      

Basic

  $0.33    $(0.17 $0.71    $0.17    $0.35   $0.51   $1.06    $0.68  

Diluted

  $0.33    $(0.17 $0.71    $0.17    $0.35   $0.51   $1.06    $0.68  

Income from discontinued operations attributable to Duke Energy Corporation common shareholders

             

Basic

  $—      $—     $—      $—      $—     $—     $—      $—    

Diluted

  $—      $—     $—      $—      $—     $—     $—      $—    

Net income (loss) attributable to Duke Energy Corporation common shareholders

       

Net income attributable to Duke Energy Corporation common shareholders

      

Basic

  $0.33    $(0.17 $0.71    $0.17    $0.35   $0.51   $1.06    $0.68  

Diluted

  $0.33    $(0.17 $0.71    $0.17    $0.35   $0.51   $1.06    $0.68  

Dividends declared per share

  $0.495    $0.485   $0.74    $0.725    $—     $—     $0.74    $0.725  

Weighted-average shares outstanding

             

Basic

   1,332     1,314    1,331     1,312     1,332    1,320    1,331     1,315  

Diluted

   1,333     1,314    1,332     1,313     1,333    1,322    1,332     1,316  

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

   June 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $1,362    $1,670  

Short-term investments

   9     —    

Receivables (net of allowance for doubtful accounts of $39 at June 30, 2011 and $34 at December 31, 2010)

   796     855  

Restricted receivables of variable interest entities (net of allowance for doubtful accounts of $39 at June 30, 2011 and $34 at December 31, 2010)

   1,173     1,302  

Inventory

   1,415     1,318  

Other

   879     1,078  
          

Total current assets

   5,634     6,223  
          

Investments and Other Assets

    

Investments in equity method unconsolidated affiliates

   457     444  

Nuclear decommissioning trust funds

   2,137     2,014  

Goodwill

   3,868     3,858  

Intangibles, net

   468     467  

Notes receivable

   62     42  

Restricted other assets of variable interest entities

   151     139  

Other

   2,233     2,300  
          

Total investments and other assets

   9,376     9,264  
          

Property, Plant and Equipment

    

Cost

   59,352     57,597  

Cost, variable interest entities

   865     942  

Less accumulated depreciation and amortization

   18,607     18,195  
          

Net property, plant and equipment

   41,610     40,344  
          

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   236     246  

Regulatory assets related to income taxes

   818     780  

Other

   2,118     2,233  
          

Total regulatory assets and deferred debits

   3,172     3,259  
          

Total Assets

  $59,792    $59,090  
          

See Notes to Unaudited Condensed Consolidated Financial Statements

   September 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $2,032    $1,670  

Short-term investments

   146     —    

Receivables (net of allowance for doubtful accounts of $35 at September 30, 2011 and $34 at December 31, 2010)

   764     855  

Restricted receivables of variable interest entities (net of allowance for doubtful accounts of $39 at September 30, 2011 and $34 at December 31, 2010)

   1,152     1,302  

Inventory

   1,421     1,318  

Other

   758     1,078  
  

 

 

   

 

 

 

Total current assets

   6,273     6,223  
  

 

 

   

 

 

 

Investments and Other Assets

    

Investments in equity method unconsolidated affiliates

   459     444  

Nuclear decommissioning trust funds

   1,924     2,014  

Goodwill

   3,847     3,858  

Intangibles, net

   371     467  

Notes receivable

   59     42  

Restricted other assets of variable interest entities

   176     139  

Other

   2,236     2,300  
  

 

 

   

 

 

 

Total investments and other assets

   9,072     9,264  
  

 

 

   

 

 

 

Property, Plant and Equipment

    

Cost

   59,861     57,597  

Cost, variable interest entities

   921     942  

Less accumulated depreciation and amortization

   18,905     18,195  
  

 

 

   

 

 

 

Net property, plant and equipment

   41,877     40,344  
  

 

 

   

 

 

 

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   232     246  

Regulatory assets related to income taxes

   843     780  

Other

   2,479     2,233  
  

 

 

   

 

 

 

Total regulatory assets and deferred debits

   3,554     3,259  
  

 

 

   

 

 

 

Total Assets

  $60,776    $59,090  
  

 

 

   

 

 

 

PART I

DUKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

(In millions, except per-share amounts)

 

  June 30,
2011
   December 31,
2010
   September 30,
2011
 December 31,
2010
 

LIABILITIES AND EQUITY

       

Current Liabilities

       

Accounts payable

  $1,189    $1,587    $1,080   $1,587  

Notes payable

   5     —       480    —    

Non-recourse notes payable of variable interest entities

   275     216     275    216  

Taxes accrued

   358     412     438    412  

Interest accrued

   272     237     269    237  

Current maturities of long-term debt

   1,008     275     1,527    275  

Other

   1,279     1,170     1,046    1,170  
          

 

  

 

 

Total current liabilities

   4,386     3,897     5,115    3,897  
          

 

  

 

 

Long-term Debt

   16,765     16,959     16,625    16,959  
          

 

  

 

 

Non-recourse long-term debt of variable interest entities

   922     976  

Non-recourse Long-term Debt of Variable Interest Entities

   959    976  
          

 

  

 

 

Deferred Credits and Other Liabilities

       

Deferred income taxes

   7,359     6,978     7,466    6,978  

Investment tax credits

   368     359     377    359  

Asset retirement obligations

   1,869     1,816     1,905    1,816  

Other

   5,421     5,452     5,430    5,452  
          

 

  

 

 

Total deferred credits and other liabilities

   15,017     14,605     15,178    14,605  
          

 

  

 

 

Commitments and Contingencies

       

Equity

       

Common Stock, $0.001 par value, 2 billion shares authorized; 1,332 million and 1,329 million shares outstanding at June 30, 2011 and December 31, 2010, respectively

   1     1  

Common Stock, $0.001 par value, 2 billion shares authorized; 1,332 million and 1,329 million shares outstanding at September 30, 2011 and December 31, 2010, respectively

   1    1  

Additional paid-in capital

   21,045     21,023     21,061    21,023  

Retained earnings

   1,448     1,496     1,920    1,496  

Accumulated other comprehensive income

   89     2     (188  2  
          

 

  

 

 

Total Duke Energy Corporation shareholders’ equity

   22,583     22,522     22,794    22,522  

Noncontrolling interests

   119     131     105    131  
          

 

  

 

 

Total equity

   22,702     22,653     22,899    22,653  
          

 

  

 

 

Total Liabilities and Equity

  $59,792    $59,090    $60,776   $59,090  
          

 

  

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011 2010   2011 2010 

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net Income

  $954   $228    $1,424   $894  

Adjustments to reconcile net income to net cash provided by operating activities

      

Depreciation and amortization (including amortization of nuclear fuel)

   991    979     1,508    1,481  

Equity component of AFUDC

   (123  (110   (193  (173

Severance expense

   —      98     —      77  

Gains on sales of other assets

   (27  (8   (19  (10

Impairment of goodwill and other long-lived assets

   9    658     309    703  

Deferred income taxes

   461    245     526    527  

Equity in earnings of unconsolidated affiliates

   (80  (65   (123  (86

(Increase) decrease in

      

Net realized and unrealized mark-to-market and hedging transactions

   13    6     37    44  

Receivables

   166    63     115    87  

Inventory

   (85  217     (87  289  

Other current assets

   128    40     248    123  

Increase (decrease) in

      

Accounts payable

   (338  (124   (455  (100

Taxes accrued

   (99  (43   30    (76

Other current liabilities

   (179  (121   (172  (94

Other assets

   81    117     91    30  

Other liabilities

   (155  (56   (212  (55
         

 

  

 

 

Net cash provided by operating activities

   1,717    2,124     3,027    3,661  
         

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Capital expenditures

   (1,938  (2,325   (2,990  (3,481

Investment expenditures

   (49  (160   (36  (61

Acquisitions

   (4  —       (50  —    

Purchases of available-for-sale securities

   (1,266  (1,232   (2,409  (1,742

Proceeds from sales and maturities of available-for-sale securities

   1,281    1,229     2,313    1,773  

Net proceeds from the sales of other assets, and sales of and collections on notes receivable

   109    5     115    8  

Purchases of emission allowances

   (4  (9   (6  (11

Sales of emission allowances

   7    17     8    20  

Change in restricted cash

   24    (37   (19  (29

Other

   2    4     4    (2
         

 

  

 

 

Net cash used in investing activities

   (1,838  (2,508   (3,070  (3,525
         

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from the:

      

Issuance of long-term debt

   499    1,363     1,015    2,450  

Issuance of common stock related to employee benefit plans

   10    112     13    215  

Payments for the redemption of long-term debt

   (82  (948   (179  (1,599

Notes payable and commercial paper

   63    (16   537    16  

Distributions to noncontrolling interests

   (18  (5   (19  (5

Dividends paid

   (657  (635   (994  (957

Other

   (2  (19   32    10  
         

 

  

 

 

Net cash used in financing activities

   (187  (148

Net cash provided by financing activities

   405    130  
         

 

  

 

 

Net decrease in cash and cash equivalents

   (308  (532

Net increase in cash and cash equivalents

   362    266  

Cash and cash equivalents at beginning of period

   1,670    1,542     1,670    1,542  
         

 

  

 

 

Cash and cash equivalents at end of period

  $1,362   $1,010    $2,032   $1,808  
         

 

  

 

 

Supplemental Disclosures

      

Significant non-cash transactions:

      

Accrued capital expenditures

  $317   $353    $276   $524  

Dividends declared but not paid

  $337   $322  

Debt associated with the consolidation of variable interest entities

  $—     $342    $—     $342  

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

         Duke Energy Corporation Shareholders
Accumulated Other Comprehensive Income (Loss)
                Duke Energy Corporation Shareholders
Accumulated Other Comprehensive Income (Loss)
       
 Common
Stock
Shares
 Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Foreign
Currency
Adjustments
 Net Gains
(Losses) on
Cash Flow
Hedges
 Other Pension and
OPEB Related
Adjustments

to AOCI
 Common
Stockholders’
Equity
 Noncontrolling
Interests
 Total
Equity
  Common
Stock
Shares
 Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Foreign
Currency
Adjustments
 Net (Losses)
Gains  on
Cash Flow
Hedges
 Other Pension and
OPEB Related
Adjustments

to AOCI
 Common
Stockholders’
Equity
 Noncontrolling
Interests
 Total
Equity
 

Balance at December 31, 2009

  1,309   $1   $20,661   $1,460   $17   $(22 $(31 $(336 $21,750   $136   $21,886    1,309   $1   $20,661   $1,460   $17   $(22 $(31 $(336 $21,750   $136   $21,886  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income

  —      —      —      223    —      —      —      —      223    5    228    —      —      —      893    —      —      —      —      893    1    894  

Other comprehensive income

                      

Foreign currency translation adjustments

  —      —      —      —      (30  —      —      —      (30  (5  (35  —      —      —      —      58    —      —      —      58    (1  57  

Pension and OPEB related adjustments to AOCI(a)

  —      —      —      —      —      —      —      15    15    —      15    —      —      —      —      —      —      —      19    19    —      19  

Net unrealized loss on cash flow hedges(b)

  —      —      —      —      —      (10  —      —      (10  —      (10  —      —      —      —      —      (9  —      —      (9  —      (9

Reclassification into earnings from cash flow hedges(c)

  —      —      —      —      —      2    —      —      2    —      2    —      —      —      —      —      2    —      —      2    —      2  

Unrealized gain on investments in auction rate securities(d)

  —      —      —      —      —       6    —      6    —      6    —      —      —      —      —       8    —      8    —      8  
         

 

  

 

  

 

          

 

  

 

  

 

 

Total comprehensive income

          206    —      206            971    —      971  

Common stock issuances, including dividend reinvestment and employee benefits

  9    —      128    —      —      —      —      —      128    —      128    15    —      251    —      —      —      —      —      251    —      251  

Common stock dividends

  —      —      —      (957  —      —      —      —      (957  —      (957  —      —      —      (957  —      —      —      —      (957  —      (957

Changes in noncontrolling interest in subsidiaries

  —      —      —      —      —      —      —      —      —      (2  (2
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at June 30, 2010

  1,318    1   $20,789   $726   $(13 $(30 $(25 $(321 $21,127   $136   $21,263  

Balance at September 30, 2010

  1,324   $1   $20,912   $1,396   $75   $(29 $(23 $(317 $22,015   $134   $22,149  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
                      
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at December 31, 2010

  1,329   $1   $21,023   $1,496   $97   $(18 $(17 $(60 $22,522   $131   $22,653    1,329   $1   $21,023   $1,496   $97   $(18 $(17 $(60 $22,522   $131   $22,653  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income

  —      —      —      946    —      —      —      —      946    8    954    —      —      —      1,418    —      —      —      —      1,418    6    1,424  

Other comprehensive income

          —      

Other Comprehensive income

          —      

Foreign currency translation adjustments

  —      —      —      —      93    —      —      —      93    3    96    —      —      —      —      (142  —      —      —      (142  (8  (150

Pension and OPEB related adjustments to AOCI(a)

  —      —      —      —      —      —      —      (7  (7  —      (7  —      —      —      —      —      —      —      (6  (6  —      (6

Net unrealized loss on cash flow hedges(b)

  —      —      —      —      —      (5  —      —      (5  —      (5  —      —      —      —      —      (52  —      —      (52  —      (52

Reclassification into earnings from cash flow hedges(c)

  —      —      —      —      —      2    —      —      2    —      2    —      —      —      —      —      3    —      —      3    —      3  

Unrealized gain on investments of auction rate securities(d)

  —      —      —      —      —      —      4    —      4    —      4    —      —      —      —      —      —      7    —      7    —      7  
         

 

  

 

  

 

          

 

  

 

  

 

 

Total comprehensive income

          1,033    11    1,044            1,228    (2  1,226  

Common stock issuances, including dividend reinvestment and employee benefits

  3    —      22    —      —      —      —      —      22    —      22    3    —      38    —      —      —      —      —      38    —      38  

Common stock dividends

  —      —      —      (994  —      —      —      —      (994  —      (994  —      —      —      (994  —      —      —      —      (994  —      (994

Changes in noncontrolling interest in subsidiaries(e)

  —      —      —      —      —      —      —      —      —      (23  (23  —      —      —      —      —      —      —      —      —      (24  (24
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at June 30, 2011

  1,332   $1   $21,045   $1,448   $190   $(21 $(13 $(67 $22,583   $119   $22,702  

Balance at September 30, 2011

  1,332   $1   $21,061   $1,920   $(45 $(67 $(10 $(66 $22,794   $105   $22,899  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(a)Net of $3 tax benefit in 2011 and $5 tax expense in 2010.
(b)Net of $2$28 tax benefit in 2011 and $3 tax benefit in 2010.
(c)Net of $1 tax expense in 2011 and insignificant tax benefit in 2010.
(d)Net of $1$6 tax expense in 2011 and $4 tax expense in 2010.
(e)Includes $18$19M in cash distributions to noncontrolling interests.interests

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CAROLINAS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions)

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2011   2010   2011   2010   2011   2010   2011   2010 

Operating Revenues-Regulated Electric

  $1,607    $1,513    $3,159    $3,058    $1,868    $1,877    $5,027    $4,935  
                  

 

   

 

   

 

   

 

 

Operating Expenses

                

Fuel used in electric generation and purchased power

   511     458     980     912     577     594     1,557     1,506  

Operation, maintenance and other

   495     470     930     930     447     471     1,377     1,401  

Depreciation and amortization

   190     192     391     385     210     200     601     585  

Property and other taxes

   81     83     165     176     94     93     259     269  
                  

 

   

 

   

 

   

 

 

Total operating expenses

   1,277     1,203     2,466     2,403     1,328     1,358     3,794     3,761  
                  

 

   

 

   

 

   

 

 

Gains on Sales of Other Assets and Other, net

   1     3     1     5     1     2     2     7  
                  

 

   

 

   

 

   

 

 

Operating Income

   331     313     694     660     541     521     1,235     1,181  

Other Income and Expenses, net

   50     62     92     112     47     51     139     163  

Interest Expense

   82     86     171     176     93     95     264     271  
                  

 

   

 

   

 

   

 

 

Income Before Income Taxes

   299     289     615     596     495     477     1,110     1,073  

Income Tax Expense

   106     87     217     202     184     162     401     364  
                  

 

   

 

��  

 

   

 

 

Net Income

  $193    $202    $398    $394    $311    $315    $709    $709  
                  

 

   

 

   

 

   

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CAROLINAS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

   June 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $143    $153  

Receivables (net of allowance for doubtful accounts of $3 at June 30, 2011 and December 31, 2010)

   746     669  

Restricted receivables of variable interest entities (net of allowance for doubtful accounts of $6 at June 30, 2011 and December 31, 2010)

   630     637  

Inventory

   771     716  

Other

   284     398  
          

Total current assets

   2,574     2,573  
          

Investments and Other Assets

    

Nuclear decommissioning trust funds

   2,137     2,014  

Other

   1,066     1,119  
          

Total investments and other assets

   3,203     3,133  
          

Property, Plant and Equipment

    

Cost

   32,040     31,191  

Less accumulated depreciation and amortization

   11,264     11,126  
          

Net property, plant and equipment

   20,776     20,065  
          

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   164     169  

Regulatory assets related to income taxes

   642     601  

Other

   776     847  
          

Total regulatory assets and deferred debits

   1,582     1,617  
          

Total Assets

  $28,135    $27,388  
          

See Notes to Unaudited Condensed Consolidated Financial Statements

   September 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $318    $153  

Receivables (net of allowance for doubtful accounts of $3 at September 30, 2011 and December 31, 2010)

   825     669  

Restricted receivables of variable interest entities (net of allowance for doubtful accounts of $6 at September 30, 2011 and December 31, 2010)

   637     637  

Inventory

   757     716  

Other

   283     398  
  

 

 

   

 

 

 

Total current assets

   2,820     2,573  
  

 

 

   

 

 

 

Investments and Other Assets

    

Nuclear decommissioning trust funds

   1,924     2,014  

Other

   1,026     1,119  
  

 

 

   

 

 

 

Total investments and other assets

   2,950     3,133  
  

 

 

   

 

 

 

Property, Plant and Equipment

    

Cost

   32,623     31,191  

Less accumulated depreciation and amortization

   11,458     11,126  
  

 

 

   

 

 

 

Net property, plant and equipment

   21,165     20,065  
  

 

 

   

 

 

 

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   161     169  

Regulatory assets related to income taxes

   661     601  

Other

   1,080     847  
  

 

 

   

 

 

 

Total regulatory assets and deferred debits

   1,902     1,617  
  

 

 

   

 

 

 

Total Assets

  $28,837    $27,388  
  

 

 

   

 

 

 

PART I

DUKE ENERGY CAROLINAS, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

(In millions)

 

  June 30,
2011
 December 31,
2010
   September 30,
2011
 December 31,
2010
 

LIABILITIES AND MEMBER’S EQUITY

      

Current Liabilities

      

Accounts payable

  $484   $856    $545   $856  

Taxes accrued

   85    114     132    114  

Interest accrued

   113    109     148    109  

Current maturities of long-term debt

   757    8     757    8  

Other

   404    485     468    485  
         

 

  

 

 

Total current liabilities

   1,843    1,572     2,050    1,572  
         

 

  

 

 

Long-term Debt

   7,211    7,462     7,216    7,462  
         

 

  

 

 

Non-recourse long-term debt of variable interest entities

   300    300  

Non-recourse Long-term Debt of Variable Interest Entities

   300    300  
         

 

  

 

 

Deferred Credits and Other Liabilities

      

Deferred income taxes

   4,302    3,988     4,530    3,988  

Investment tax credits

   216    205     226    205  

Accrued pension and other post-retirement benefits

   242    242     237    242  

Asset retirement obligations

   1,778    1,728     1,814    1,728  

Other

   2,928    2,975     2,836    2,975  
         

 

  

 

 

Total deferred credits and other liabilities

   9,466    9,138     9,643    9,138  
         

 

  

 

 

Commitments and Contingencies

      

Member’s Equity

      

Member’s Equity

   9,336    8,938     9,647    8,938  

Accumulated other comprehensive loss

   (21  (22   (19  (22
         

 

  

 

 

Total member’s equity

   9,315    8,916     9,628    8,916  
         

 

  

 

 

Total Liabilities and Member’s Equity

  $28,135   $27,388    $28,837   $27,388  
         

 

  

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CAROLINAS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011 2010   2011 2010 

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income

  $398   $394    $709   $709  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization (including amortization of nuclear fuel)

   486    476     752    730  

Equity component of AFUDC

   (82  (83   (125  (129

Severance expense

   —      64     —      61  

Gains on sales of other assets and other, net

   (1  (5   (2  (7

Deferred income taxes

   311    145     498    260  

Accrued pension and other post-retirement benefit costs

   17    17     25    26  

(Increase) decrease in

      

Net realized and unrealized mark-to-market and hedging transactions

   2    —       2    —    

Receivables

   143    (3   96    (37

Inventory

   (43  142     (25  217  

Other current assets

   141    1     122    (1

Increase (decrease) in

      

Accounts payable

   (322  (48   (288  42  

Taxes accrued

   (29  (1   18    4  

Other current liabilities

   (57  (95   (34  (50

Other assets

   (18  (1   25    26  

Other liabilities

   (143  (80   (206  (117
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   803    923     1,567    1,734  
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Capital expenditures

   (1,070  (1,190   (1,604  (1,737

Purchases of available-for-sale securities

   (767  (640   (1,598  (871

Proceeds from sales and maturities of available-for-sale securities

   743    627     1,561    845  

Sales of emission allowances

   1    5     2    7  

Change in restricted cash

   2    —       2    7  

Notes due from affiliate

   (211  303     (250  267  

Other

   (7  (4   (9  (8
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (1,309  (899   (1,896  (1,490
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from the issuance of long-term debt

   499    449     499    692  

Payments for the redemption of long-term debt

   (1  (502   (2  (602

Distribution to parent

   —      (350   —      (350

Other

   (2  (2   (3  (4
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   496    (405   494    (264
  

 

  

 

   

 

  

 

 

Net decrease in cash and cash equivalents

   (10  (381

Net increase (decrease) in cash and cash equivalents

   165    (20

Cash and cash equivalents at beginning of period

   153    394     153    394  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $143   $13    $318   $374  
  

 

  

 

   

 

  

 

 

Supplemental Disclosures

      

Significant non-cash transactions:

      

Accrued capital expenditures

  $140   $134    $122   $212  

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CAROLINAS, LLC

CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

    Accumulated Other Comprehensive
Income (Loss)
       Accumulated Other Comprehensive
(Loss) Income
   
  Member’s
Equity
 Net Gains
(Losses) on

Cash Flow
Hedges
 Other Total   Member’s
Equity
 Net (Losses)
Gains on

Cash Flow Hedges
 Other Total 

Balance at December 31, 2009

  $8,304   $(24 $(9 $8,271    $8,304   $(24 $(9 $8,271  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

   394    —      —      394     709    —      —      709  

Other comprehensive income

          

Reclassification into earnings from cash flow hedges(a)

   —      1    —      1     —      2    —      2  

Unrealized gain on investments in auction rate securities(b)

   —      —      1    1     —      —      2    2  
     

 

      

 

 

Total comprehensive income

      396        713  

Distribution to parent

   (350  —      —      (350   (350  —      —      (350
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balance at June 30, 2010

  $8,348   $(23 $(8 $8,317  

Balance at September 30, 2010

  $8,663   $(22 $(7 $8,634  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 
          
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balance at December 31, 2010

  $8,938   $(20 $(2 $8,916    $8,938   $(20 $(2 $8,916  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

   398    —      —      398     709    —      —      709  

Other comprehensive income

      —          —    

Reclassification into earnings from cash flow hedges(a)

    1    —      1      3    —      3  
     

 

      

 

 

Total comprehensive income

      399        712  
     

 

      

 

 

Balance at June 30, 2011

  $9,336   $(19 $(2 $9,315  

Balance at September 30, 2011

  $9,647   $(17 $(2 $9,628  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(a)Net of $2$1 tax expense in 2011 and $1 tax expense in 2010.
(b)Net of $1 tax expense in 2010.

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY OHIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions)

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2011   2010 2011   2010   2011   2010   2011   2010 

Operating Revenues

               

Regulated electric

  $361    $447   $733    $929    $442    $520    $1,175    $1,449  

Non-regulated electric and other

   239     115    510     339     315     325     825     664  

Regulated natural gas

   94     87    330     358     81     78     411     436  
                 

 

   

 

   

 

   

 

 

Total operating revenues

   694     649    1,573     1,626     838     923     2,411     2,549  
                 

 

   

 

   

 

   

 

 

Operating Expenses

               

Fuel used in electric generation and purchased power—regulated

   91     129    188     270     111     140     299     410  

Fuel used in electric generation and purchased power—non-regulated

   147     97    311     181     189     138     500     319  

Cost of natural gas and coal sold

   22     20    141     178     12     13     153     191  

Operation, maintenance and other

   215     200    420     386     186     191     606     577  

Depreciation and amortization

   88     93    176     203     83     97     259     300  

Property and other taxes

   63     58    136     133     64     65     200     198  

Goodwill and other impairment charges

   9     837    9     837     79     —       88     837  
                 

 

   

 

   

 

   

 

 

Total operating expenses

   635     1,434    1,381     2,188     724     644     2,105     2,832  
                 

 

   

 

   

 

   

 

 

Gains on Sales of Other Assets and Other, net

   —       4    2     3     2     —       4     3  
                 

 

   

 

   

 

   

 

 

Operating Income (Loss)

   59     (781  194     (559   116     279     310     (280

Other Income and Expenses, net

   4     7    9     14     8     8     17     22  

Interest Expense

   27     28    51     58     27     26     78     84  
                 

 

   

 

   

 

   

 

 

Income (Loss) Before Income Taxes

   36     (802  152     (603   97     261     249     (342

Income Tax Expense (Benefit)

   3     (43  46     26  

Income Tax Expense

   46     85     92     111  
                 

 

   

 

   

 

   

 

 

Net Income (Loss)

  $33    $(759 $106    $(629  $51    $176    $157    $(453
                 

 

   

 

   

 

   

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY OHIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 

ASSETS

        

Current Assets

        

Cash and cash equivalents

  $165    $228    $216    $228  

Receivables (net of allowance for doubtful accounts of $18 at June 30, 2011 and December 31, 2010)

   680     888  

Receivables (net of allowance for doubtful accounts of $16 at September 30, 2011 and $18 at December 31, 2010)

   497     888  

Inventory

   258     254     283     254  

Other

   79     121     149     121  
          

 

   

 

 

Total current assets

   1,182     1,491     1,145     1,491  
          

 

   

 

 

Investments and Other Assets

        

Goodwill

   921     921     921     921  

Intangibles, net

   234     248     148     248  

Other

   32     62     55     62  
          

 

   

 

 

Total investments and other assets

   1,187     1,231     1,124     1,231  
          

 

   

 

 

Property, Plant and Equipment

        

Cost

   10,422     10,259     10,516     10,259  

Less accumulated depreciation and amortization

   2,521     2,411     2,579     2,411  
          

 

   

 

 

Net property, plant and equipment

   7,901     7,848     7,937     7,848  
          

 

   

 

 

Regulatory Assets and Deferred Debits

        

Deferred debt expense

   21     23     21     23  

Regulatory assets related to income taxes

   75     78     74     78  

Other

   358     353     358     353  
          

 

   

 

 

Total regulatory assets and deferred debits

   454     454     453     454  
          

 

   

 

 

Total Assets

  $10,724    $11,024    $10,659    $11,024  
          

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

DUKE ENERGY OHIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

(In millions, except share and per-share amounts)

 

  June 30,
2011
 December 31,
2010
   September 30,
2011
 December 31,
2010
 

LIABILITIES AND COMMON STOCKHOLDER’S EQUITY

      

Current Liabilities

      

Accounts payable

  $373   $467    $295   $467  

Taxes accrued

   99    153     155    153  

Interest accrued

   25    22     33    22  

Current maturities of long-term debt

   7    7     507    7  

Other

   79    99     92    99  
         

 

  

 

 

Total current liabilities

   583    748     1,082    748  
         

 

  

 

 

Long-term Debt

   2,555    2,557     2,051    2,557  
         

 

  

 

 

Deferred Credits and Other Liabilities

      

Deferred income taxes

   1,719    1,640     1,802    1,640  

Investment tax credits

   8    9     8    9  

Accrued pension and other post-retirement benefit costs

   209    207     188    207  

Asset retirement obligations

   28    27     28    27  

Other

   336    372     364    372  
         

 

  

 

 

Total deferred credits and other liabilities

   2,300    2,255     2,390    2,255  
         

 

  

 

 

Commitments and Contingencies

      

Common Stockholder’s Equity

      

Common Stock, $8.50 par value, 120,000,000 shares authorized; 89,663,086 shares outstanding at June 30, 2011 and December 31, 2010

   762    762  

Common Stock, $8.50 par value, 120,000,000 shares authorized; 89,663,086 shares outstanding at September 30, 2011 and December 31, 2010

   762    762  

Additional paid-in capital

   5,285    5,570     5,085    5,570  

Retained deficit

   (740  (846   (689  (846

Accumulated other comprehensive loss

   (21  (22   (22  (22
         

 

  

 

 

Total common stockholder’s equity

   5,286    5,464     5,136    5,464  
         

 

  

 

 

Total Liabilities and Common Stockholder’s Equity

  $10,724   $11,024    $10,659   $11,024  
         

 

  

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY OHIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011 2010   2011 2010 

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income (loss)

  $106   $(629  $157   $(453

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization

   177    204     261    301  

Severance expense

   —      21     —      23  

Gains on sales of other assets and other, net

   (2  (3   (4  (3

Impairment of goodwill and other long-lived assets

   9    837     88    837  

Deferred income taxes

   85    (70   165    28  

Accrued pension and other post-retirement benefit costs

   6    7     11    11  

(Increase) decrease in

      

Net realized and unrealized mark-to-market and hedging transactions

   12    (2   15    (34

Receivables

   124    71     170    56  

Inventory

   (4  22     (29  1  

Other current assets

   15    41     (35  66  

Increase (decrease) in

      

Accounts payable

   (79  (145   (150  (217

Taxes accrued

   (55  —       2    (2

Other current liabilities

   (6  (21   18    (17

Other assets

   23    24     9    15  

Other liabilities

   (45  (18   (55  (31
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   366    339     623    581  
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Capital expenditures

   (230  (189   (344  (242

Purchases of emission allowances

   (4  (8   (5  (10

Sales of emission allowances

   6    9     6    10  

Notes due from affiliate

   86    (265   221    (113

Change in restricted cash

   4    —       (18  —    

Other

   (2  —       (3  —    
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (140  (453   (143  (355
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from the issuance of long-term debt

   —      7     —      7  

Payments for the redemption of long-term debt

   (4  (4   (7  (7

Dividend to parent

   (285  —    

Notes payable and commercial paper

   —      (12

Dividends to parent

   (485  —    
  

 

  

 

   

 

  

 

 

Net cash (used in) provided by financing activities

   (289  3  

Net cash used in financing activities

   (492  (12
  

 

  

 

   

 

  

 

 

Net decrease in cash and cash equivalents

   (63  (111

Net (decrease) increase in cash and cash equivalents

   (12  214  

Cash and cash equivalents at beginning of period

   228    127     228    127  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $165   $16    $216   $341  
  

 

  

 

   

 

  

 

 

Supplemental Disclosures

      

Significant non-cash transactions:

      

Accrued capital expenditures

  $25   $51    $18   $92  

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY OHIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

          Accumulated Other
Comprehensive Income (Loss)
             Accumulated Other
Comprehensive (Loss) Income
   
  Common
Stock
   Additional
Paid-in
Capital
 Retained
Earnings
 Net Gains
(Losses) on
Cash Flow
Hedges
   Pension and
OPEB Related
Adjustments
to AOCI
 Total   Common
Stock
   Additional
Paid-in
Capital
 Retained
Earnings
 Net Gains
(Losses) on
Cash Flow
Hedges
 Pension and
OPEB Related
Adjustments
to AOCI
 Total 

Balance at December 31, 2009

  $762    $5,570   $(405 $1    $(30 $5,898    $762    $5,570   $(405 $1   $(30 $5,898  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Net loss

   —       —      (629  —       —      (629   —       —      (453  —      —      (453

Other comprehensive income

                 

Pension and OPEB related adjustments to AOCI(a)

   —       —      —      —       1    1  

Reclassification into earnings from cash flow hedges(a)

   —       —      —      (1  —      (1

Pension and OPEB related adjustments to AOCI(b)

   —       —      —      —      1    1  
         

 

         

 

 

Total comprehensive loss

          (628         (453
           

 

   

 

  

 

  

 

  

 

  

 

 
  

 

   

 

  

 

  

 

   

 

  

 

 

Balance at June 30, 2010

  $762    $5,570   $(1,034 $1    $(29 $5,270  

Balance at September 30, 2010

  $762    $5,570   $(858 $—     $(29 $5,445  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 
                 
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Balance at December 31, 2010

  $762    $5,570   $(846 $—      $(22 $5,464    $762    $5,570   $(846 $—     $(22 $5,464  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Net income

   —       —      106    —       —      106  

Other comprehensive income

          —    

Pension and OPEB related adjustments to AOCI(a)

   —       —      —      —       1    1  
         

 

 

Total comprehensive income

          107  
         

 

 

Net income and total comprehensive income

      157      157  

Dividends to parent

     (285      (285     (485     (485
           

 

   

 

  

 

  

 

  

 

  

 

 

Balance at September 30, 2011

  $762    $5,085   $(689 $—     $(22 $5,136  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Balance at June 30, 2011

  $762    $5,285   $(740 $—      $(21 $5,286  
  

 

   

 

  

 

  

 

   

 

  

 

 

 

(a)Net of $1insignificant tax benefit in 2010.
(b)Net of insignificant tax expense in both 2011 and 2010.

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY INDIANA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions)

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2011   2010   2011   2010   2011 2010   2011   2010 

Operating Revenues-Regulated Electric

  $620    $579    $1,279    $1,189    $718   $694    $1,997    $1,883  
                  

 

  

 

   

 

   

 

 

Operating Expenses

               

Fuel used in electric generation and purchased power

   232     201     478     426     270    256     748     682  

Operation, maintenance and other

   163     171     324     314     148    131     472     445  

Depreciation and amortization

   97     85     197     186     100    95     297     281  

Property and other taxes

   19     13     41     33     20    19     61     52  

Impairment charges

   222    44     222     44  
                  

 

  

 

   

 

   

 

 

Total operating expenses

   511     470     1,040     959     760    545     1,800     1,504  
                  

 

  

 

   

 

   

 

 

Operating Income

   109     109     239     230  

Operating (Loss) Income

   (42  149     197     379  
                  

 

  

 

   

 

   

 

 

Other Income and Expenses, net

   21     14     44     32     26    19     70     51  

Interest Expense

   34     34     70     67     34    32     104     99  
                  

 

  

 

   

 

   

 

 

Income Before Income Taxes

   96     89     213     195  

Income Tax Expense

   28     32     69     68  

(Loss) Income Before Income Taxes

   (50  136     163     331  

Income Tax (Benefit) Expense

   (19  44     50     112  
                  

 

  

 

   

 

   

 

 

Net Income

  $68    $57    $144    $127  

Net (Loss) Income

  $(31 $92    $113    $219  
                  

 

  

 

   

 

   

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY INDIANA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

 

   June 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $19    $54  

Receivables (net of allowance for doubtful accounts of $2 at June 30, 2011 and $1 at December 31, 2010)

   259     431  

Inventory

   297     267  

Other

   78     85  
          

Total current assets

   653     837  
          

Investments and Other Assets

    

Intangibles, net

   61     64  

Other

   126     126  
          

Total investments and other assets

   187     190  
          

Property, Plant and Equipment

    

Cost

   11,669     11,213  

Less accumulated depreciation and amortization

   3,383     3,341  
          

Net property, plant and equipment

   8,286     7,872  
          

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   41     43  

Regulatory assets related to income taxes

   101     101  

Other

   553     588  
          

Total regulatory assets and deferred debits

   695     732  
          

Total Assets

  $9,821    $9,631  
          

See Notes to Unaudited Condensed Consolidated Financial Statements

   September 30,
2011
   December 31,
2010
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

  $21    $54  

Receivables (net of allowance for doubtful accounts of $1 at both September 30,  2011 and December 31, 2010)

   223     431  

Inventory

   283     267  

Other

   35     85  
  

 

 

   

 

 

 

Total current assets

   562     837  
  

 

 

   

 

 

 

Investments and Other Assets

    

Intangibles, net

   53     64  

Other

   120     126  
  

 

 

   

 

 

 

Total investments and other assets

   173     190  
  

 

 

   

 

 

 

Property, Plant and Equipment

    

Cost

   11,711     11,213  

Less accumulated depreciation and amortization

   3,445     3,341  
  

 

 

   

 

 

 

Net property, plant and equipment

   8,266     7,872  
  

 

 

   

 

 

 

Regulatory Assets and Deferred Debits

    

Deferred debt expense

   40     43  

Regulatory assets related to income taxes

   108     101  

Other

   614     588  
  

 

 

   

 

 

 

Total regulatory assets and deferred debits

   762     732  
  

 

 

   

 

 

 

Total Assets

  $9,763    $9,631  
  

 

 

   

 

 

 

PART I

DUKE ENERGY INDIANA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

(In millions, except share and per-share amounts)

 

   June 30,
2011
   December 31,
2010
 

LIABILITIES AND COMMON STOCKHOLDER’S EQUITY

    

Current Liabilities

    

Accounts payable

  $319    $314  

Taxes accrued

   45     45  

Interest accrued

   52     47  

Current maturities of long-term debt

   12     11  

Other

   92     99  
          

Total current liabilities

   520     516  
          

Long-term Debt

   3,458     3,461  
          

Deferred Credits and Other Liabilities

    

Deferred income taxes

   1,009     973  

Investment tax credits

   144     145  

Accrued pension and other post-retirement benefit costs

   265     270  

Asset retirement obligations

   46     46  

Other

   668     653  
          

Total deferred credits and other liabilities

   2,132     2,087  
          

Commitments and Contingencies

    

Common Stockholder’s Equity

    

Common Stock, no par; $0.01 stated value, 60,000,000 shares authorized; 53,913,701 shares outstanding at June 30, 2011 and December 31, 2010

   1     1  

Additional paid-in capital

   1,358     1,358  

Retained earnings

   2,344     2,200  

Accumulated other comprehensive income

   8     8  
          

Total common stockholder’s equity

   3,711     3,567  
          

Total Liabilities and Common Stockholder’s Equity

  $9,821    $9,631  
          

   September 30,
2011
   December 31,
2010
 

LIABILITIES AND COMMON STOCKHOLDER’S EQUITY

    

Current Liabilities

    

Accounts payable

  $277    $314  

Notes payable

   14     —    

Taxes accrued

   122     45  

Interest accrued

   49     47  

Current maturities of long-term debt

   13     11  

Other

   90     99  
  

 

 

   

 

 

 

Total current liabilities

   565     516  
  

 

 

   

 

 

 

Long-term Debt

   3,456     3,461  
  

 

 

   

 

 

 

Deferred Credits and Other Liabilities

    

Deferred income taxes

   881     973  

Investment tax credits

   143     145  

Accrued pension and other post-retirement benefit costs

   261     270  

Asset retirement obligations

   47     46  

Other

   731     653  
  

 

 

   

 

 

 

Total deferred credits and other liabilities

   2,063     2,087  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Common Stockholder’s Equity

    

Common Stock, no par; $0.01 stated value, 60,000,000 shares authorized; 53,913,701 shares outstanding at September 30, 2011 and December 31, 2010

   1     1  

Additional paid-in capital

   1,358     1,358  

Retained earnings

   2,313     2,200  

Accumulated other comprehensive income

   7     8  
  

 

 

   

 

 

 

Total common stockholder’s equity

   3,679     3,567  
  

 

 

   

 

 

 

Total Liabilities and Common Stockholder’s Equity

  $9,763    $9,631  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY INDIANA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011 2010   2011 2010 

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income

  $144   $127    $113   $219  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

   200    189     301    285  

Equity component of AFUDC

   (39  (23   (64  (40

Severance expense

   —      26     —      26  

Impairment charges

   222    44  

Deferred income taxes and investment tax credit amortization

   39    69     (67  82  

Accrued pension and other post-retirement benefit costs

   11    11     16    18  

(Increase) decrease in

      

Receivables

   89    (22   97    (2

Inventory

   (31  52     (17  66  

Other current assets

   6    (31   18    8  

Increase (decrease) in

      

Accounts payable

   (9  (114   (35  (98

Taxes accrued

   —      (5   76    1  

Other current liabilities

   (4  (23   (9  (21

Other assets

   15    12     19    4  

Other liabilities

   (27  (17   (47  (38
         

 

  

 

 

Net cash provided by operating activities

   394    251     623    554  
         

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Capital expenditures

   (512  (644   (783  (922

Purchases of available-for-sale securities

   (2  (12   (7  (17

Proceeds from sales and maturities of available-for-sale securities

   1    14     5    19  

Purchases of emission allowances

   —      (1   —      (1

Sales of emission allowances

   —      3     1    3  

Notes due from affiliate

   85    15     115    (160

Change in restricted cash

   4    1     6    (5

Other

   (3  (1   (3  —    
         

 

  

 

 

Net cash used in investing activities

   (427  (625   (666  (1,083
         

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from the issuance of long-term debt

   —      12     —      571  

Payments for the redemption of long-term debt

   (2  (2   (4  (197

Notes payable to affiliate

   14    —    

Capital contribution from parent

   —      350     —      350  

Other

   —      (3
         

 

  

 

 

Net cash (used in) provided by financing activities

   (2  360  

Net cash provided by financing activities

   10    721  
         

 

  

 

 

Net decrease in cash and cash equivalents

   (35  (14

Net (decrease) increase in cash and cash equivalents

   (33  192  

Cash and cash equivalents at beginning of period

   54    20     54    20  
         

 

  

 

 

Cash and cash equivalents at end of period

  $19   $6    $21   $212  
         

 

  

 

 

Supplemental Disclosures

      

Significant non-cash transactions:

      

Accrued capital expenditures

  $143   $140    $127   $155  

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY INDIANA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

              Accumulated
Other  Comprehensive
Income (Loss)
                 Accumulated
Other Comprehensive
Income (Loss)
   
  Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Net Gains
(Losses) on
Cash Flow
Hedges
 Total   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Net Gains
(Losses) on
Cash Flow
Hedges
 Total 

Balance at December 31, 2009

  $1    $1,008    $1,915    $10   $2,934    $1    $1,008    $1,915    $10   $2,934  
                     

 

   

 

   

 

   

 

  

 

 

Net income

   —       —       127     —      127     —       —       219     —      219  

Other comprehensive loss

                  

Reclassification into earnings from cash flow hedges(a)

   —       —       —       (1  (1   —       —       —       (2  (2
                    

 

 

Total comprehensive income

          126            217  

Capital contribution from parent

   —       350     —       —      350     —       350     —       —      350  
                     

 

   

 

   

 

   

 

  

 

 

Balance at June 30, 2010

  $1    $1,358    $2,042    $9   $3,410  

Balance at September 30, 2010

  $1    $1,358    $2,134    $8   $3,501  
                     

 

   

 

   

 

   

 

  

 

 
                  
                     

 

   

 

   

 

   

 

  

 

 

Balance at December 31, 2010

  $1    $1,358    $2,200    $8   $3,567    $1    $1,358    $2,200    $8   $3,567  
                     

 

   

 

   

 

   

 

  

 

 

Net income and total comprehensive income

   —       —       144     —      144  

Net income

   —       —       113     —      113  

Other comprehensive loss

         

Reclassification into earnings from cash flow hedges(a)

         (1  (1
                            

 

 

Balance at June 30, 2011

  $1    $1,358    $2,344    $8   $3,711  

Total comprehensive income

   —       —       —        112  
                     

 

   

 

   

 

   

 

  

 

 

Balance at September 30, 2011

  $1    $1,358    $2,313    $7   $3,679  
  

 

   

 

   

 

   

 

  

 

 

 

(a)Net of insignificant$1 tax benefit in 2011 and 2010.

See Notes to Unaudited Condensed Consolidated Financial Statements

PART I

 

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements

Index to Combined Notes To Unaudited Condensed Consolidated Financial Statements

The unaudited notes to the condensed consolidated financial statements that follow are a combined presentation. The following list indicates the registrants to which the footnotes apply:

 

Registrant

  

Applicable Notes

Duke Energy Corporation

  1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20

Duke Energy Carolinas, LLC

  1, 2, 4, 5, 6, 8, 9, 10, 11, 14, 15, 16, 17, 18, 19, 20

Duke Energy Ohio, Inc.

  1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 14, 15, 16, 17, 18, 19, 20

Duke Energy Indiana, Inc.

  1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 14, 15, 16, 17, 18, 19, 20

1. Organization and Basis of Presentation

Organization.Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) is an energy company primarily located in the Americas. Duke Energy operates in the United States (U.S.) primarily through its direct and indirect wholly-owned subsidiaries, Duke Energy Carolinas, LLC (Duke Energy Carolinas), Duke Energy Ohio, Inc. (Duke Energy Ohio), which includes Duke Energy Kentucky, Inc. (Duke Energy Kentucky), and Duke Energy Indiana, Inc. (Duke Energy Indiana), as well as in South and Central America through International Energy. When discussing Duke Energy’s condensed consolidated financial information, it necessarily includes the results of its three separate subsidiary registrants, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana (collectively referred to as the Subsidiary Registrants), which, along with Duke Energy, are collectively referred to as the Duke Energy Registrants. The information in these combined notes relates to each of the Duke Energy Registrants as noted in the Index to the Combined Notes. However, none of the registrants makes any representation as to information related solely to Duke Energy or the subsidiaries of Duke Energy other than itself. See Note 2 for information related to reportable operating segments for each of the Duke Energy Registrants.

Duke Energy Carolinas generates, transmits, distributes and sells electricity in North Carolina and South Carolina. Duke Energy Carolinas is subject to the regulatory provisions of the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina (PSCSC), the U.S. Nuclear Regulatory Commission (NRC) and the Federal Energy Regulatory Commission (FERC). Substantially all of Duke Energy Carolinas’ operations are regulated and qualify for regulatory accounting treatment.

Duke Energy Ohio is a wholly-owned subsidiary of Cinergy Corp. (Cinergy), which is a wholly-owned subsidiary of Duke Energy. Duke Energy Ohio is a combination electric and gas public utility that provides service in the southwestern portion of Ohio and in northern Kentucky through its wholly-owned subsidiary Duke Energy Kentucky, as well as electric generation in parts of Ohio, Illinois, Indiana and Pennsylvania. Duke Energy Ohio’s principal lines of business include generation, transmission and distribution of electricity and the sale of and/or transportation of natural gas. Duke Energy Ohio is subject to the regulatory provisions of the Public Utilities Commission of Ohio (PUCO), the Kentucky Public Service Commission (KPSC) and the FERC. Duke Energy Ohio applies regulatory accounting treatment to substantially all of the operations of its U.S. Franchised Electric and Gas operating segment and to certain rate riders associated with retail generation of its Commercial Power operating segment. See Note 2 for information about business segments.

Duke Energy Indiana is a wholly-owned subsidiary of Cinergy. Duke Energy Indiana is an electric utility that provides service in north central, central, and southern Indiana. Its primary line of business is generation, transmission and distribution of electricity. Duke Energy Indiana is subject to the regulatory provisions of the Indiana Utility Regulatory Commission (IURC) and the FERC. The substantial majority of Duke Energy Indiana’s operations are regulated and qualify for regulatory accounting treatment.

See Note 3 for information regarding Duke Energy’s pending merger with Progress Energy, Inc (Progress)(Progress Energy).

Basis of Presentation.These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP in the U.S. for annual financial statements. Because the interim Unaudited Condensed Consolidated Financial Statements and Notes do not include all of the information and notes required by GAAP in the U.S. for annual financial statements, the Unaudited Condensed Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the respective Consolidated Financial Statements and Notes in Duke Energy’s, Duke Energy Carolinas’, Duke Energy Ohio’s and Duke Energy Indiana’s respective Form 10-K for the year ended December 31, 2010. These Unaudited Condensed Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of the respective company’s management, necessary to fairly present the financial position and results of operations of each Duke Energy Registrant. Amounts reported in each Duke Energy Registrants’ interim Unaudited Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption, regulatory rulings, the timing of maintenance on electric generating units, changes in mark-to-market valuations, changing commodity prices and other factors.

These Unaudited Condensed Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of the Duke Energy Registrants and all majority-owned subsidiaries where the respective Duke Energy Registrants have control and those variable interest entities (VIEs) where the respective Duke Energy Registrants are the primary beneficiary. These Unaudited Condensed Consolidated Financial Statements also reflect Duke Energy Carolinas’ approximate 19.25% proportionate share of the Catawba Nuclear Station, as well as Duke Energy Ohio’s proportionate share of certain generation and transmission facilities in Ohio, Indiana and Kentucky and Duke Energy Indiana’s proportionate share of certain generation and transmission facilities.

Use of Estimates.To conform to GAAP in the U.S., management makes estimates and assumptions that affect the amounts reported in the Unaudited Condensed Consolidated Financial Statements and Notes. Although these estimates are based on management’s best available information at the time, actual results could differ.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Unbilled Revenue.Revenue. Revenues on sales of electricity and gas are recognized when either the service is provided or the product is delivered. Unbilled retail revenues are estimated by applying average revenue per kilowatt-hour or per thousand cubic feet (Mcf) for all customer classes to the number of estimated kilowatt-hours or Mcfs delivered but not billed. Unbilled wholesale energy revenues are calculated by applying the contractual rate per megawatt-hour (MWh) to the number of estimated MWh delivered but not yet billed. Unbilled wholesale demand revenues are calculated by applying the contractual rate per megawatt (MW) to the MW volume delivered but not yet billed. The amount of unbilled revenues can vary significantly from period to period as a result of numerous factors, including seasonality, weather, customer usage patterns and customer mix.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

At JuneSeptember 30, 2011 and December 31, 2010, Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy OhioIndiana had unbilled revenues within Restricted Receivables of Variable Interest Entities and Receivables on their respective Condensed Consolidated Balance Sheets as follows:

 

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Duke Energy

  $700    $751    $599    $751  

Duke Energy Carolinas

   327     322     265     322  

Duke Energy Ohio(a)

   35     54     46     54  

Duke Energy Indiana

   6     12  

 

(a)Primarily relates to wholesale sales within the Commercial Power segment.

Additionally, Duke Energy Ohio and Duke Energy Indiana sell, on a revolving basis, nearly alla portion of their retail and wholesale accounts receivable to Cinergy Receivables. These transfers meet sales/derecognition criteria and therefore, Duke Energy Ohio and Duke Energy Indiana, account for the transfers of receivables to Cinergy Receivables as sales, and accordingly the receivables sold are not reflected on the Condensed Consolidated Balance Sheets of Duke Energy Ohio and Duke Energy Indiana. ReceivablesAmounts for unbilled revenues related to retail and wholesale accounts receivable at Duke Energy Ohio and Duke Energy Indiana included in the sales of accounts receivable to Cinergy Receivables at JuneSeptember 30, 2011 and December 31, 2010 were as follows:

 

  June 30,
2011
   December 31,
2010
   September
30, 2011
   December 31,
2010
 
  (in millions)   (in millions) 

Duke Energy Ohio

  $64    $112    $61    $112  

Duke Energy Indiana

   104     125     98     125  

See Note 11 for additional information.

2. Business Segments

Management evaluates segment performance based on earnings before interest and taxes from continuing operations (excluding certain allocated corporate governance costs), after deducting expenses attributable to noncontrolling interests related to those profits (EBIT). On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of amounts attributable to noncontrolling interests related to those profits. Segment EBIT includes transactions between reportable segments. Cash, cash equivalents and short-term investments are managed centrally by Duke Energy, so the associated interest and dividend income and realized and unrealized gains and losses from foreign currency transactions on those balances are excluded from segment EBIT.

Duke Energy

Duke Energy has the following reportable operating segments: U.S. Franchised Electric and Gas (USFE&G), Commercial Power and International Energy.

USFE&G generates, transmits, distributes and sells electricity in central and western North Carolina, western South Carolina, central, north central and southern Indiana, and northern Kentucky. USFE&G also transmits and distributes electricity in southwestern Ohio. Additionally, USFE&G transports and sells natural gas in southwestern Ohio and northern Kentucky. It conducts operations primarily through Duke Energy Carolinas, certain regulated portions of Duke Energy Ohio including Duke Energy Kentucky, and Duke Energy Indiana.

Commercial Power owns, operates and manages power plants and engages in the wholesale marketing and procurement of electric power, fuel and emission allowances related to these plants, as well as other contractual positions. Commercial Power also has a retail sales subsidiary, Duke Energy Retail Sales, LLC (Duke Energy Retail), which is certified by the PUCO as a Competitive Retail Electric Service provider in Ohio. Through Duke Energy Generation Services, Inc. and its affiliates (DEGS), Commercial Power develops, owns and operates electric generation for large energy consumers, municipalities, utilities and industrial facilities. In addition, DEGS engages in the development, construction and operation of renewable energy projects and is also developing transmission projects.

International Energy principally operates and manages power generation facilities and engages in sales and marketing of electric power and natural gas outside the U.S. It conducts operations primarily through Duke Energy International, LLC (Duke Energy International) and its affiliates and its activities principally target power generation in Latin America. Additionally, International Energy owns a 25% interest in National Methanol Company, located in Saudi Arabia, which is a large regional producer of methanol and methyl tertiary butyl ether.

The remainder of Duke Energy’s operations is presented as Other. While it is not an operating segment, Other primarily includes certain unallocated corporate costs, which include certain costs not allocable to Duke Energy’ reportable business segments, primarily governance, costs to achieve mergers and divestitures, and costs associated with certain corporate severance programs. It also includes, Bison Insurance Company Limited (Bison), Duke Energy’s wholly-owned, captive insurance subsidiary, Duke Energy’s 50% interest in DukeNet Communications, LLC (DukeNet) and related telecommunications businesses, and Duke Energy Trading and Marketing, LLC (DETM), which is 40% owned by Exxon Mobil Corporation and 60% owned by Duke Energy. Prior to the sale of a 50% ownership in DukeNet to investment funds managed by Alinda Capital Partners, LLC (collectively Alinda) in December 2010, Other reflected the results of Duke Energy’s 100% ownership of DukeNet.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Business Segment Data

 

  Unaffiliated
Revenues
 Intersegment
Revenues
 Total
Revenues
 Segment EBIT  /
Consolidated
Income(Loss)
From  Continuing
Operations Before
Income Taxes
 Depreciation  and
Amortization
   Unaffiliated
Revenues
 Intersegment
Revenues
 Total
Revenues
 Segment EBIT /
Consolidated
Income
From Continuing
Operations  Before
Income Taxes
 Depreciation and
Amortization
 
  (in millions)   (in millions) 

Three Months Ended June 30, 2011

      

USFE&G

  $2,540   $9   $2,549   $619   $333  

Three Months Ended September 30, 2011

      

USFE&G(a)

  $2,917   $9   $2,926   $721   $352  

Commercial Power

   592    3    595    59    58     684    3    687    67    56  

International Energy

   406    —      406    179    22     360    —      360    168    23  
                  

 

  

 

  

 

  

 

  

 

 

Total reportable segments

   3,538    12    3,550    857    413     3,961    12    3,973    956    431  

Other

   (4  13    9    (57  24     3    11    14    (74  24  

Eliminations

   —      (25  (25  —      —       —      (23  (23  —      —    

Interest expense

   —      —      —      (203  —       —      —      —      (213  —    

Interest income and other(c)

   —      —      —      25    —    

Interest income and other(d)

   —      —      —      7    —    

Add back of noncontrolling interest component of reportable segment and Other EBIT

   —      —      —      11    —       —      —      —      1    —    
                  

 

  

 

  

 

  

 

  

 

 

Total consolidated

  $3,534   $—     $3,534   $633   $437    $3,964   $—     $3,964   $677   $455  
                  

 

  

 

  

 

  

 

  

 

 

Three Months Ended June 30, 2010

      

USFE&G

  $2,416   $6   $2,422   $671   $326  

Commercial Power(a)

   537    3    540    (604  55  

Three Months Ended September 30, 2010

      

USFE&G(a)

  $2,934   $10   $2,944   $946   $350  

Commercial Power

   736    1    737    188    54  

International Energy

   310    —      310    126    21     273    —      273    110    21  
                  

 

  

 

  

 

  

 

  

 

 

Total reportable segments

   3,263    9    3,272    193    402     3,943    11    3,954    1,244    425  

Other(b)

   24    13    37    (122  24  

Other(c)

   3    14    17    (100  22  

Eliminations

   —      (22  (22  —      —       —      (25  (25  —      —    

Interest expense

   —      —      —      (212  —       —      —      —      (202  —    

Interest income and other(c)

   —      —      —      26    —    

Add back of noncontrolling interest component of reportable segment and Other EBIT

   —      —      —      13    —    

Interest income and other(d)

   —      —      —      25    —    
                  

 

  

 

  

 

  

 

  

 

 

Total consolidated

  $3,287   $—     $3,287   $(102 $426    $3,946   $—     $3,946   $967   $447  
                  

 

  

 

  

 

  

 

  

 

 

Six Months Ended June 30, 2011

      

USFE&G

  $5,214   $18   $5,232   $1,331   $680  

Nine Months Ended September 30, 2011

      

USFE&G(a)

  $8,131   $27   $8,158   $2,052   $1,032  

Commercial Power

   1,234    5    1,239    150    117     1,918    8    1,926    217    173  

International Energy

   754    —      754    359    43     1,114    —      1,114    527    66  
                  

 

  

 

  

 

  

 

  

 

 

Total reportable segments

   7,202    23    7,225    1,840    840     11,163    35    11,198    2,796    1,271  

Other

   (5  25    20    (102  51     (2  36    34    (176  75  

Eliminations

   —      (48  (48  —      —       —      (71  (71  —      —    

Interest expense

   —      —      —      (422  —       —      —      —      (635  —    

Interest income and other(c)

   —      —      —      46    —    

Interest income and other(d)

   —      —      —      53    —    

Add back of noncontrolling interest component of reportable segment and Other EBIT

   —      —      —      17    —       —      —      —      18    —    
                  

 

  

 

  

 

  

 

  

 

 

Total consolidated

  $7,197   $—     $7,197   $1,379   $891    $11,161   $—     $11,161   $2,056   $1,346  
                  

 

  

 

  

 

  

 

  

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

   Unaffiliated
Revenues
   Intersegment
Revenues
  Total
Revenues
  Segment EBIT  /
Consolidated
Income(Loss)
From  Continuing
Operations Before
Income Taxes
  Depreciation  and
Amortization
 
   (in millions) 

Six Months Ended June 30, 2010

       

USFE&G

  $5,083    $15   $5,098   $1,415   $683  

Commercial Power(a)

   1,114     5    1,119    (475  113  

International Energy

   646     —      646    266    42  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total reportable segments

   6,843     20    6,863    1,206    838  

Other(b)

   38     27    65    (268  44  

Eliminations

   —       (47  (47  —      —    

Interest expense

   —       —      —      (422  —    

Interest income and other(c)

   —       —      —      37    —    

Add back of noncontrolling interest
component of reportable segment and
Other EBIT

   —       —      —      16    —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total consolidated

  $6,881    $—     $6,881   $569   $882  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
   Unaffiliated
Revenues
   Intersegment
Revenues
  Total
Revenues
  Segment EBIT /
Consolidated
Income
From Continuing
Operations  Before
Income Taxes
  Depreciation and
Amortization
 
   (in millions) 

Nine Months Ended September 30, 2010

       

USFE&G(a)

  $8,017    $25   $8,042   $2,361   $1,033  

Commercial Power(b)

   1,850     6    1,856    (287  167  

International Energy

   919     —      919    376    63  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total reportable segments

   10,786     31    10,817    2,450    1,263  

Other(c)

   41     41    82    (368  66  

Eliminations

   —       (72  (72  —      —    

Interest expense

   —       —      —      (624  —    

Interest income and other(d)

   —       —      —      62    —    

Add back of noncontrolling interest component of reportable segment and Other EBIT

   —       —      —      16    —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total consolidated

  $10,827    $—     $10,827   $1,536   $1,329  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)As discussed in Note 4, Duke Energy recorded a pre-tax charge of $222 million in the third quarter of 2011 and a $44 million pre-tax charge in the third quarter of 2010 related to the Edwardsport IGCC project.
(b)As discussed in Note 7, in the second quarter of 2010, Commercial Power recorded impairment charges of $660 million, which consisted of a $500 million goodwill impairment charge associated with the non-regulated Midwest generation operations and a $160 million charge to write-down the value of certain non-regulated Midwest generating assets and emission allowances primarily associated with these generation assets.
(b)(c)During the three and sixnine months ended JuneSeptember 30, 2010, Other recorded a $76$20 million and $144$164 million expense, respectively, related to the 2010 voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina (See Note 15).
(c)(d)Other within Interest Income and Other includes foreign currency transaction gains and losses and additional noncontrolling interest amounts not allocated to the reportable segments and Other results.

Segment assets in the following table exclude all intercompany assets.

Segment Assets

 

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

USFE&G

  $46,070    $45,210    $46,827    $45,210  

Commercial Power

   6,654     6,704     6,739     6,704  

International Energy

   4,745     4,310     4,379     4,310  
  

 

   

 

   

 

   

 

 

Total reportable segments

   57,469     56,224     57,945     56,224  

Other

   2,198     2,845     2,730     2,845  

Reclassifications(a)

   125     21     101     21  
  

 

   

 

   

 

   

 

 

Total consolidated assets

  $59,792    $59,090    $60,776    $59,090  
  

 

   

 

   

 

   

 

 

 

(a)Primarily represents reclassification of federal tax balances in consolidation.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Duke Energy Carolinas

Duke Energy Carolinas has one reportable operating segment, Franchised Electric, which generates, transmits, distributes and sells electricity and conducts operations through Duke Energy Carolinas, which consists of the regulated electric utility business in North Carolina and South Carolina.

The remainder of Duke Energy Carolinas’ operations is presented as Other. While it is not considered an operating segment, Other primarily includes certain corporate governance costs allocated by its parent, Duke Energy (see Note 17).

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Business Segment Data

 

  Segment EBIT/ Consolidated Income
Before Income Taxes
   Segment EBIT/ Consolidated Income
Before Income Taxes
 
  Three Months Ended June 30, Six Months Ended June 30,   Three Months Ended September 30, Nine Months Ended September 30, 
  2011 2010 2011 2010   2011 2010 2011 2010 
  (in millions)   (in millions) 

Franchised Electric

  $413   $436   $859   $913    $627   $654   $1,486   $1,567  
               

 

  

 

  

 

  

 

 

Total reportable segment

   413    436    859    913     627    654    1,486    1,567  

Other(a)

   (40  (77)  (81  (159   (40  (85  (121  (244

Interest expense

   (82  (86  (171  (176   (93  (95  (264  (271

Interest income

   8    16    8    18     1    3    9    21  
               

 

  

 

  

 

  

 

 

Total consolidated

  $299   $289   $615   $596    $495   $477   $1,110   $1,073  
               

 

  

 

  

 

  

 

 

 

(a)During the three and sixnine months ended JuneSeptember 30, 2010, Other recorded a $44$13 million and a $85$98 million expense, respectively, related to the 2010 voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina (See Note 15).

Unaffiliated Revenues

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, substantially all of Duke Energy Carolinas’ revenues are from its Franchised Electric operating segment. There were no intersegment revenues for the three and sixnine months ended JuneSeptember 30, 2011 and 2010.

Depreciation and Amortization

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, substantially all of Duke Energy Carolinas’ depreciation and amortization are from its Franchised Electric operating segment.

Segment Assets

At JuneSeptember 30, 2011 and December 31, 2010, substantially all of Duke Energy Carolinas’ assets are owned by its Franchised Electric operating segment.

Duke Energy Ohio

Duke Energy Ohio has two reportable operating segments, Franchised Electric and Gas and Commercial Power.

Franchised Electric and Gas transmits and distributes electricity in southwestern Ohio and generates, transmits, distributes, and sells electricity in northern Kentucky. Franchised Electric and Gas also transports and sells natural gas in southwestern Ohio and northern Kentucky. It conducts operations primarily through Duke Energy Ohio and its wholly-owned subsidiary Duke Energy Kentucky.

Commercial Power owns, operates and manages power plants and engages in the wholesale marketing and procurement of electric power, fuel and emission allowances related to these plants, as well as other contractual positions. Duke Energy Ohio’s Commercial Power reportable operating segment does not include the operations of DEGS or Duke Energy Retail, which is included in the Commercial Power reportable operating segment at Duke Energy.

The remainder of Duke Energy Ohio’s operations is presented as Other. While it is not considered an operating segment, Other primarily includes certain governance costs allocated by its parent, Duke Energy (see Note 17).

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Business Segment Data

 

  Unaffiliated
Revenues(a)
   Segment EBIT/
Consolidated  Income
(Loss)
Before Income
Taxes
 Depreciation  and
Amortization
   Unaffiliated
Revenues (a)
   Segment EBIT/
Consolidated Income
(Loss)
Before Income
Taxes
 Depreciation and
Amortization
 
  (in millions)   (in millions) 

Three Months Ended June 30, 2011

     

Three Months Ended September 30, 2011

     

Franchised Electric and Gas

  $315    $61   $45    $333    $93   $42  

Commercial Power

   379     18    43     505     44    41  
             

 

   

 

  

 

 

Total reportable segments

   694     79    88     838     137    83  

Other

   —       (19  —       —       (16  —    

Interest expense

   —       (27  —       —       (27  —    

Interest income and other

   —       3    —       —       3    —    
             

 

   

 

  

 

 

Total consolidated

  $694    $36   $88    $838    $97   $83  
             

 

   

 

  

 

 

Three Months Ended June 30, 2010

     

Three Months Ended September 30, 2010

     

Franchised Electric and Gas

  $367    $102   $56  

Commercial Power(c)

   556     196    41  
  

 

   

 

  

 

 

Total reportable segments

   923     298    97  

Other

   —       (19  —    

Interest expense

   —       (26  —    

Interest income and other

   —       8    —    
  

 

   

 

  

 

 

Total consolidated

  $923    $261   $97  
  

 

   

 

  

 

 

Nine Months Ended September 30, 2011

     

Franchised Electric and Gas

  $1,112    $251   $133  

Commercial Power

   1,299     118    126  
  

 

   

 

  

 

 

Total reportable segments

   2,411     369    259  

Other

   —       (52  —    

Interest expense

   —       (78  —    

Interest income and other

   —       10    —    
  

 

   

 

  

 

 

Total consolidated

  $2,411    $249   $259  
  

 

   

 

  

 

 

Nine Months Ended September 30, 2010

     

Franchised Electric and Gas(b)

  $322    $(134 $49    $1,204    $69   $168  

Commercial Power(c)

   327     (618  44     1,345     (273  132  
             

 

   

 

  

 

 

Total reportable segments

   649     (752  93     2,549     (204  300  

Other

   —       (25  —       —       (71  —    

Interest expense

   —       (28  —       —       (84  —    

Interest income and other

   —       3    —       —       17    —    
             

 

   

 

  

 

 

Total consolidated

  $649    $(802 $93    $2,549    $(342 $300  
             

 

   

 

  

 

 

Six Months Ended June 30, 2011

     

Franchised Electric and Gas

  $779    $158   $91  

Commercial Power

   794     74    85  
           

Total reportable segments

   1,573     232    176  

Other

   —       (36  —    

Interest expense

   —       (51  —    

Interest income and other

   —       7    —    
           

Total consolidated

  $1,573    $152   $176  
           

Six Months Ended June 30, 2010

     

Franchised Electric and Gas(b)

  $837    $(33 $112  

Commercial Power(c)

   789     (469  91  
           

Total reportable segments

   1,626     (502  203  

Other

   —       (52  —    

Interest expense

   —       (58  —    

Interest income and other

   —       9    —    
           

Total consolidated

  $1,626    $(603 $203  
           

 

(a)There was an insignificant amount of intersegment revenues for the three and sixnine months ended JuneSeptember 30, 2011 and 2010.
(b)In the second quarter of 2010, Franchised Electric and Gas recorded a goodwill impairment charge of $216 million related to the Ohio Transmission and Distribution (Ohio T&D) reporting unit. This impairment charge was not applicable to Duke Energy. See Note 7 for additional information.
(c)As discussed in Note 7, in the second quarter of 2010, Commercial Power recorded impairment charges of $621 million, which consisted of a $461 million goodwill impairment charge associated with the non-regulated Midwest generation operations and a $160 million charge to write-down the value of certain non-regulated Midwest generating assets and emission allowances primarily associated with these generation assets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Segment Assets

 

  June 30,
2011
 December 31,
2010
   September 30,
2011
 December 31,
2010
 
  (in millions)   (in millions) 

Franchised Electric and Gas

  $6,223   $6,258    $6,210   $6,258  

Commercial Power

   4,675    4,821     4,573    4,821  
  

 

  

 

   

 

  

 

 

Total reportable segments

   10,898    11,079     10,783    11,079  

Other

   83    192     162    192  

Eliminations and reclassifications

   (257  (247   (286  (247
  

 

  

 

   

 

  

 

 

Total consolidated assets

  $10,724   $11,024    $10,659   $11,024  
  

 

  

 

   

 

  

 

 

Duke Energy Indiana

Duke Energy Indiana has one reportable operating segment, Franchised Electric, which generates, transmits, distributes and sells electricity and conducts operations through Duke Energy Indiana, which consists of the regulated electric utility business in north central, central and southern Indiana.

The remainder of Duke Energy Indiana’s operations is presented as Other. While it is not considered an operating segment, Other primarily includes certain governance costs allocated by its parent, Duke Energy (see Note 17).

Business Segment Data

 

  Segment EBIT/ Consolidated Income
Before Income Taxes
   Segment EBIT/Consolidated (Loss)/Income
Before Income Taxes
 
  Three Months Ended June 30, Six Months Ended June 30,   Three Months Ended September 30, Nine Months Ended September 30, 
  2011 2010 2011 2010   2011 2010 2011 2010 
  (in millions)       (in millions)     

Franchised Electric(a)

  $139   $148   $301   $306    $(6 $178   $295   $484  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total reportable segment

   139    148    301    306     (6  178    295    484  

Other

   (13  (27  (26  (50   (13  (15  (39  (65

Interest expense

   (34  (34  (70  (67   (34  (32  (104  (99

Interest income and other

   4    2    8    6     3    5    11    11  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total consolidated

  $96   $89   $213   $195    $(50 $136   $163   $331  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(a)As discussed in Note 4, Duke Energy Indiana recorded a pre-tax charge of $222 million in the third quarter of 2011 and a $44 million pre-tax charge in the third quarter of 2010 related to the Edwardsport IGCC project.

Unaffiliated Revenues

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, substantially all of Duke Energy Indiana’s revenues are from its Franchised Electric operating segment. There were no intersegment revenues for the three and sixnine months ended JuneSeptember 30, 2011 and 2010.

Depreciation and Amortization

For the three and sixnine months ended JuneSeptember 30, 2011 and 2010, substantially all of Duke Energy Indiana’s depreciation and amortization are from its Franchised Electric operating segment.

Segment Assets

At JuneSeptember 30, 2011 and December 31, 2010, all of Duke Energy Indiana’s assets are owned by its Franchised Electric operating segment.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

3. Acquisitions and Sales of Other Assets

Acquisitions.The Duke Energy Registrants consolidate assets and liabilities from acquisitions as of the purchase date, and include earnings from acquisitions in consolidated earnings after the purchase date.

Duke Energy

On January 8, 2011, Duke Energy entered into an Agreement and Plan of Merger (Merger Agreement) among Diamond Acquisition Corporation, a North Carolina corporation and Duke Energy’s wholly-owned subsidiary (Merger Sub) and Progress Energy, a North Carolina corporation. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Progress Energy with Progress Energy continuing as the surviving corporation and a wholly-owned subsidiary of Duke Energy.

Pursuant to the Merger Agreement, upon the closing of the merger, each issued and outstanding share of Progress Energy common stock will automatically be cancelled and converted into the right to receive 2.6125 shares of common stock of Duke Energy, subject to appropriate adjustment for a reverse stock split of the Duke Energy common stock as contemplated in the Merger Agreement and except that any shares of Progress Energy common stock that are owned by Progress Energy or Duke Energy, other than in a fiduciary capacity, will be cancelled without any consideration therefor. Each outstanding option to acquire, and each outstanding equity award relating to, one share of Progress Energy common stock will be converted into an option to acquire, or an equity award relating to 2.6125 shares of Duke Energy Commoncommon stock, as applicable, subject to appropriate adjustment for the reverse stock split. Based on Progress Energy shares

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

outstanding at JuneSeptember 30, 2011, Duke Energy would issue 770771 million shares of common stock to convert the Progress Energy common shares in the merger under the unadjusted exchange ratio of 2.6125. The exchange ratio will be adjusted proportionately to reflect a 1-for-3 reverse stock split with respect to the issued and outstanding Duke Energy common stock that Duke Energy plans to implement prior to, and conditioned on, the completion of the merger. The resulting adjusted exchange ratio is 0.87083 of a share of Duke Energy common stock for each share of Progress Energy common stock. Based on Progress Energy shares outstanding at JuneSeptember 30, 2011, Duke Energy would issue 257 million shares of common stock, after the effect of the 1-for-3 reverse stock split, to convert the Progress Energy common shares in the merger. The merger will be accounted for under the acquisition method of accounting with Duke Energy treated as the acquirer, for accounting purposes. Based on the market price of Duke Energy common stock on JuneSeptember 30, 2011, the transaction would be valued at $14.5$15.4 billion and would result in incremental recorded goodwill to Duke Energy of $8.3$9.3 billion, according to current estimates. Duke Energy would also assume all of Progress Energy’s outstanding debt, which is estimated to be $13.8$15.1 billion based on the approximate fair value of Progress Energy’s outstanding indebtedness at JuneSeptember 30, 2011. The Merger Agreement has been unanimously approved by both companies’ Boards of Directors.

The merger is conditioned upon, among other things, approval by the shareholders of both companies, as well as expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and approval by the FERC, the Federal Communications Commission (FCC), the NRC, the NCUC, and the KPSC. In connection with the merger, Duke Energy and Progress Energy also are also seeking review of the merger by the PSCSC and approval of the PSCSC forjoint dispatch agreement by the future merger of their Carolinas utility companies, Duke Energy Carolinas and Progress Energy Carolinas.PSCSC. Although there are no merger-specific regulatory approvals required in Indiana, Ohio or Florida, the companies will continue to update the public services commissions in those states on the merger, as applicable and as required. The status of these matters is as follows:

 

On March 17, 2011, Duke Energy filed an initial registration statement on Form S-4 with the Securities and Exchange Commission (SEC) for shares to be issued to consummate the merger with Progress Energy. On July 7, 2011, the Form S-4 was declared effective by the SEC, and the joint proxy statement/prospectus contained in the Form S-4 was mailed to the shareholders of both companies thereafter. Meetings forOn August 23, 2011, Duke Energy and Progress Energy shareholders to vote onapproved the Merger are scheduled for August 23, 2011.proposed merger. In addition, Duke Energy shareholders approved a 1-for-3 reverse stock split.

 

On March 28, 2011, Duke Energy and Progress Energy submitted Hart-Scott-Rodino antitrust filings to the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). The parties have met their obligations under the Hart-Scott-Rodino Act, which is no longer a bar to closing the transaction.

 

On March 30, 2011, Progress Energy made filings with the NRC for approval for indirect transfer of control of licenses for Progress Energy’s nuclear facilities to include Duke Energy as the ultimate parent corporation on these licenses.

 

On April 4, 2011, Duke Energy and Progress Energy filed a merger application and joint dispatch agreement with the NCUC. On September 2, 2011, Duke Energy, Progress Energy and the NC Public Staff filed a settlement agreement with the NCUC. Under the settlement agreement, the companies will guarantee North Carolina customers their allocable share of $650 million in savings related to fuel and joint dispatch of generation assets over the first five years after the merger closes, continue community financial support for a minimum of four years, contribute to weatherization efforts of low-income customers and workforce development and agree not to recover direct merger-related costs. A public hearing has been scheduled to begin onoccurred September 20,20-22, 2011 and proposed orders and/or briefs must be filed by November 14, 2011.

 

On April 4, 2011, Duke Energy and Progress Energy filed a merger application with the KPSC. On June 24, 2011, Duke Energy and Progress Energy filed a settlement agreement with the Attorney General. A public hearing occurred on July 8, 2011. An order conditionally approving the settlement agreementmerger was issued on August 2, 2011. The KPSC requiresrequired Duke Energy and Progress Energy to accept all the conditions contained in the order within seven days.days of the order. After seeking an extension, on August 19, 2011, Duke Energy and Progress Energy filed for clarification of one of the merger conditions. On September 15, 2011, Duke Energy and Progress Energy filed for approval of a stipulation revising the merger condition. On October 28, 2011, the KPSC issued an order approving the stipulation and merger.

 

On April 4, 2011, Duke Energy and Progress Energy, madejointly filed applications with the FERC for the approval of the merger, the Joint Dispatch Agreement and the joint filingsOpen Access Transmission Tariff (OATT). On September 30, 2011, the FERC conditionally approved the merger, subject to approval of mitigation measures to address its finding that the combined company could have an adverse effect on competition in wholesale power markets in the Duke Energy Carolinas and Progress Energy Carolinas East balancing authority areas. On October 17, 2011, Duke Energy and Progress Energy filed their plan for mitigating the FERC’s concerns by proposing to offer on a daily basis a certain quantity of power during summer and winter periods to the extent it is available after serving native load and existing firm obligations. The price will be incremental cost, plus 10 percent. Intervenors may comment on the plan by November 16, 2011, after which time, the FERC will rule on whether the mitigation plan adequately addresses the market power issues. FERC has not yet ruled on the Joint Dispatch Agreement or the joint OATT. On October 31, 2011, Duke Energy and Progress Energy filed a request for rehearing with the FERC. The request states that the FERC is expectedapplied a more stringent analysis to rule on the proposed merger application within 180 days.than required by its current rules. Duke Energy and Progress Energy also requested that the FERC address the companies’ previously filed mitigation plan no later than December 15, 2011.

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On April 25, 2011, Duke Energy and Progress Energy, on behalf of their utility companies Duke Energy Carolinas and Progress Energy Carolinas, filed an application requesting the PSCSC to review the merger and approve the proposed Joint Dispatch Agreement and the prospective future merger of Duke Energy Carolinas and Progress Energy Carolinas. On September 13, 2011, Duke Energy and Progress Energy withdrew their application seeking approval for the future merger of their Carolinas utility companies, Duke Energy Carolinas and Progress Energy Carolinas, as the merger of these entities is not likely to occur for several years after the close of the merger. On October 13, 2011 the PSCSC issued an order suspending all scheduled deadlines and the hearing date until Duke Energy and Progress Energy file their proposed mitigation measures with the FERC and the PSCSC. Duke Energy and Progress Energy made that filing on October 17, 2011. On November 2, 2011, the PSCSC adopted a revised procedural schedule for its review of the merger. Hearings are scheduled to begin the week of December 12, 2011. The PSCSC has not yet scheduled a public hearing.docket will remain open pending FERC issuance of its final orders on the merger related actions before the FERC.

 

On July 12, 2011, Duke Energy and Progress Energy filed an application with the FCC for approval of radio system license transfers. The FCC approved the transfers on July 27, 2011.

Duke Energy is targeting completion of the merger by the end of 2011, however no assurances can be given as to the timing of the satisfaction of all closing conditions or that all required approvals will be received.

The Merger Agreement contains certain termination rights for both Duke Energy and Progress Energy, and further provides for the payment of a termination fee of $400 million by Progress Energy under specified circumstances and a termination fee of $675 million by Duke Energy under specified circumstances.

For the three and sixnine months ended JuneSeptember 30, 2011, Duke Energy incurred transaction and integration costs related to the Progress Energy merger of $5$13 million and $16$29 million, respectively, which are recorded within Operating Expenses in Duke Energy’s Condensed Consolidated Statement of Operations.

See Note 5 for information regarding litigation related to the pending merger with Progress Energy.

    Sales of Other Assets.Vermillion Generating Station.

Duke Energy Ohio and Duke Energy Indiana

In May 2011, Duke Energy Vermillion II, LLC (Duke Energy Vermillion), an indirect wholly-owned subsidiary of Duke Energy Ohio, entered into an agreement to sell its 75% undivided ownership interest in the Vermillion Generating Station to Duke Energy Indiana and Wabash Valley Power Association (WVPA). On August 12, 2011, the FERC approved the Vermillion transaction. An IURC hearing was held in September 2011 with an order expected in the fourth quarter of 2011. If approved by the FERC and the IURC, Duke Energy Indiana and WVPA will acquire 62.5% and 12.5% interests in the Vermillion Generating Station, respectively. As Duke Energy Indiana is an affiliate of Duke Energy Vermillion the transaction will be accounted for as a transfer between entities under common control with no gain or loss recorded and is not expected to have a significant impact to Duke Energy Ohio or Duke Energy Indiana’s results of operations. At June 30, 2011, the carrying value of the proportionate share of Vermillion Generating Station which is expected to be sold to WVPA exceeded its estimated fair value. The estimated fair value was determined based on the expected proceeds to be received from WVPA less costs to sell. Accordingly, Duke Energy Ohio’s Commercial Power segment recorded an impairment of $9 million in the second quarter of 2011. This amount is presented in Goodwill and other impairment charges in Duke Energy and Duke Energy Ohio’s condensed consolidated statements of operations. See Note 5 for further discussion of the Vermillion transaction.

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4. Regulatory Matters

Progress Energy Merger. See Note 3 for information regarding Duke Energy’s pending merger with Progress Energy, Inc.Energy.

Rate Related Information. The NCUC, PSCSC, IURC and KPSC approve rates for retail electric and gas services within their states. The PUCO approves rates for retail gas and electric service within Ohio, except that non-regulated sellers of gas and electric generation also are allowed to operate in Ohio. The FERC approves rates for electric sales to wholesale customers served under cost-based rates, as well as sales of transmission service.

Duke Energy Ohio Standard Service Offer (SSO).Ohio law provides the PUCO authority to approve an electric utility’s generation SSO. A SSO may include an Electric Security Plan (ESP), which would allow for the pricing structures used by Duke Energy Ohio since 2004, or a Market Rate Offer (MRO), in which pricing is determined over time, through a competitive bidding process. On November 15, 2010, Duke Energy Ohio filed for approval of its next SSO to replace the existing ESP that expires on December 31, 2011. The filing requested approval of a MRO. On February 23, 2011, the PUCO stated that Duke Energy Ohio did not file an application for a five-year MRO as required under Ohio statute. On June 20, 2011, Duke Energy Ohio filed an application with the PUCO for approval of an ESP for its customers beginning January 1, 2012, with rates in effect through May 31, 2021. The ESP would unbundle generation service by separating capacity (physical assets) from energy (actual output). The capacity component would be paid by all customers through an unavoidable charge, adjusted on an annual basis, with all customers sharing in the net profits from

On October 24, 2011, Duke Energy Ohio’s sale of energyOhio and ancillary services. The energy componentmost intervenors, including the PUCO Staff, entered into a settlement stipulation. If approved by the PUCO, the stipulation would be procured through aestablish an ESP with competitive bidding process and would be avoidable by customers who choose alternative suppliers. The capacity charge would provideauctions for a returnterm of January 1, 2012 through May 31, 2015. The stipulation also includes provision for a non-bypassable stability charge of $110 million per year to be collected from 2012-2014 and on investment inrequires Duke Energy Ohio’sOhio to transfer its generation assets andto a non-regulated affiliate on or before December 31, 2014. The stipulation requests that the costPUCO approve the settlement on or before November 15, 2011, to acquire capacityallow Duke Energy Ohio to meet reserve margin requirements.conduct auctions to serve SSO customers effective January 1, 2012. A hearing is scheduled for September 20, 2011, with an order expected before year-end.on the stipulation occured on November 3, 2011.

Duke Energy Carolinas North Carolina Rate Case.Case. On July 1, 2011, Duke Energy Carolinas filed a rate case with the NCUC to request an average 15% increase in retail revenues, or approximately $646 million, with a rate of return on equity of 11.5%. The increase is designed to recover the cost of the ongoing generation fleet modernization program, environmental compliance and other capital investments made since 2009.

On November 1, 2011, the NC Public Staff filed testimony to limit Duke Energy Carolinas to an average 4.8% increase in retail rates, or approximately $211 million, with a rate of return on equity of 9.25%.

A hearing is scheduled to begin with the NCUC on November 28, 2011. If approved by the NCUC,Duke Energy Carolinas expects revised rates would likely go into effect in February 2012.

Duke Energy Carolinas South Carolina Rate Case.On August 5, 2011, Duke Energy Carolinas filed a rate case with the PSCSC to request an average 15% increase in retail revenues, or approximately $216 million, with a rate of return on equity of 11.5%. The increase is designed to recover the cost of the ongoing generation fleet modernization program, environmental compliance and other capital investments made since 2009. A hearing is scheduled with the PSCSC on December 7, 2011. If approved by the PSCSC, rates would likely go into effect in February 2012.

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Duke Energy Indiana Energy Efficiency.On September 28, 2010, Duke Energy Indiana filed a petition for new energy efficiency programs to enable meeting the IURC’s energy efficiency mandates. Duke Energy Indiana’s proposal requests recovery of costs through a rider including lost revenues and incentives for core plus energy efficiency programs and lost revenues and cost recovery for core energy efficiency programs. AThe hearing was heldoccurred in July 2011 and an order is expected by year-end.in the fourth quarter of 2011.

Duke Energy Indiana Storm Cost Deferrals. On July 14, 2010, the IURC approved Duke Energy Indiana’s deferral of $12 million of retail jurisdictional storm expense until the next retail rate proceeding. This amount represents a portion of costs associated with a January 27, 2009 ice storm, which damaged Duke Energy Indiana’s distribution system. On August 12, 2010, the Indiana Office of Utility Consumer Counselor (OUCC) filed a notice of appeal with the IURC. On December 7, 2010, the IURC issued an order reopening this proceeding for review in consideration of the evidence presented as a result of an internal audit performed as part of an IURC investigation of Duke Energy Indiana’s hiring of an attorney from the IURC staff which resulted in the IURC’s termination of the employment of the Chairman of the IURC. The audit did not find that the order conflicted with the staff report; however, it did note that the staff report offered no specific recommendation to either approve or deny the requested relief, and that the original order was appealed. The IURC set a new procedural schedule to take supplemental testimony and an evidentiary hearing was held in June 2011. AnOn October 19, 2011, the IURC issued an order is expected by year end.denying Duke Energy Indiana the right to defer the storm expense discussed above.

Duke Energy Ohio Storm Cost Recovery. On December 11, 2009, Duke Energy Ohio filed an application with the PUCO to recover Hurricane Ike storm restoration costs of $31 million through a discrete rider. The PUCO granted the request to defer the costs associated with the storm recovery; however, they further ordered Duke Energy Ohio to file a separate action pursuant to which the actual amount of recovery would be determined. On January 11, 2011, the PUCO approved recovery of $14 million plus carrying costs which will be spread over a three-year period. In December 2010, Duke Energy Ohio recorded a $17 million disallowance of costs previously deferred. Duke Energy Ohio filed an application for rehearing on February 10, 2011, as did the consumer advocate, the office of the Ohio Consumers’ Council (OCC). On March 9, 2011, the PUCO denied the rehearing requests of Duke Energy Ohio and the OCC. Duke Energy Ohio filed a notice of appeal with the Ohio Supreme Court on May 6, 2011.2011 and briefs have been filed by Duke Energy Ohio and the PUCO. Oral arguments are to be scheduled by the Court.

Capital Expansion Projects.

Overview.USFE&G is engaged in planning efforts to meet projected load growth in its service territories. Capacity additions may include new nuclear, Integrated Gasification Combined Cycle (IGCC), coal facilities or gas-fired generation units. Because of the long lead times required to develop such assets, USFE&G is taking steps now to ensure those options are available.

Duke Energy Carolinas William States Lee III Nuclear Station. In December 2007, Duke Energy Carolinas filed an application with the NRC, which has been docketed for review, for a combined Construction and Operating License (COL) for two Westinghouse AP1000 (advanced passive) reactors for the proposed William States Lee III Nuclear Station (Lee Nuclear Station) at a site in Cherokee County, South Carolina. Each reactor is capable of producing 1,117 MW. Submitting the COL application does not commit Duke Energy Carolinas to build nuclear units. Duke Energy Carolinas had previously received approval to incur project development costs associated with Lee Nuclear Station from both the NCUC and the PSCSC. Through several separate orders, the NCUC and PSCSC have deemed Duke Energy’s decision to incur project development and pre-construction costs for the project as reasonable and prudent through December 31, 2009 and up to an aggregate maximum amount of $230 million. On November 15, 2010 and January 7, 2011, Duke Energy Carolinas filed amended project development applications with the NCUC and PSCSC, respectively. These applications request approval of Duke Energy Carolinas’ decision to continue to incur project development and pre-construction costs for the project through December 31, 2013, and up to $459 million. The hearing before the NCUC occurred March 15, 2011. The PSCSC hearing occurred on May 16 and May 17, 2011.

On July 1, 2011, the PSCSC issued an order approving the settlement agreement in its entirety. The order statedstating Duke Energy Carolinas must incur only those costs necessary to keep the project available as an option in the 2021 time frame, not to exceed South Carolina’s allocable share of $120 million, including allowance for funds used during construction (AFUDC), for the period of January 1, 2011 through June 30, 2012. Also, pursuant to the terms of the settlement agreement, Duke Energy Carolinas shall provide certain monthly reports to the PSCSC and the Office of Regulatory Staff (ORS). Duke Energy Carolinas has also agreed to provide a monthly report to certain parties on the progress of negotiations to acquire an interest in the V.C. Summer Nuclear Station (refer to discussion below) expansion being developed by South Carolina Public Service Authority (Santee Cooper) and South Carolina Electric & Gas Company (SCE&G). Any change in ownership interest, output allocation, sharing of costs or control and any future option agreements concerning Lee Nuclear Station shall be subject to prior approval of the PSCSC.

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On August 5, 2011, the NCUC issued an order approving Duke Energy’s decision to incur project development costs up to North Carolina’s allocable share of $120 million and subject to the limitation that it is only appropriate to incur such costs necessary to maintain the status quo with respect to the Lee Nuclear Station, including the COL application at the NRC.

On April 18, 2011, the Blue Ridge Environmental Defense League (BREDL) filed a petition requesting that the NRC suspend all pending reactor licensing decisions pending the investigation of lessons learned from the Fukushima Daiichi Nuclear Power Station accident in Japan. Duke Energy Carolinas filed a response opposing this petition. In addition to its emergency petition, on August 11, 2011, BREDL also filed a “Motion to Admit new Contention Regarding the Safety and Environmental Implications of the Nuclear Regulatory Commission Task Force Report on the Fukushima Dai-ichi Accident.” Duke Energy Carolinas filed a response opposing admission of this new contention. On September 9, 2011, the NRC issued a decision denying BREDL’s emergency petition, and is awaitingon October 18, 2011, the Atomic Safety and Licensing Board issued a ruling fromdecision denying admission of the NRC.new contention.

The NRC review of the COL application continues and the estimated receipt of the COL is in mid 2013. Duke Energy Carolinas filed with the DOE for a federal loan guarantee, which has the potential to significantly lower financing costs associated with the proposed Lee Nuclear Station; however, it was not among the four projects selected by the DOE for the final phase of due diligence for the federal loan guarantee program. The project could be selected in the future if the program funding is expanded or if any of the current finalists drop out of the program.

Duke Energy Carolinas is seeking partners for Lee Nuclear Station by issuing options to purchase an ownership interest in the plant. In the first quarter of 2011, Duke Energy Carolinas entered into an agreement with JEA that provides JEA with an option to purchase up to a 20% undivided ownership interest in Lee Nuclear Station. JEA has 90 days following Duke Energy Carolinas’ receipt of the COL to exercise the option.

Duke Energy Carolinas V.C. Summer Nuclear Station Letter of Intent. In July 2011, Duke Energy Carolinas signed a letter of intent with Santee Cooper related to the potential acquisition by the CompanyDuke Energy Carolinas of a five percent to ten percent ownership interest in the V.C. Summer Nuclear Station being developed by Santee Cooper and SCE&G near Jenkinsville, South Carolina. The letter of intent provides a path for Duke Energy Carolinas to conduct the necessary due diligence to determine if future participation in this project is beneficial for its customers.

Duke Energy Carolinas Cliffside Unit 6.On March 21, 2007, the NCUC issued an order allowing Duke Energy Carolinas to build one 800 MW coal-fired unit. Following final equipment selection and the completion of detailed engineering, Cliffside Unit 6 is expected to have a net output of 825 MW. On January 31, 2008, Duke Energy Carolinas filed its updated cost estimate of $1.8 billion (excluding AFUDC of $600 million) for the approved new Cliffside Unit 6. In March 2010, Duke Energy Carolinas filed an update to the cost estimate of $1.8 billion (excluding AFUDC) with the NCUC where it reduced the estimated AFUDC financing costs to $400 million as a result of the December 2009 rate case settlement with the NCUC that allowed the inclusion of construction work in progress in rate base prospectively. Duke Energy

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Carolinas believes that the overall cost of Cliffside Unit 6 will be reduced by $125 million in federal advanced clean coal tax credits, as discussed in Note 5. Cliffside Unit 6 is expected to begin operation by the end of 2012. Also, see noteNote 5 for information related to the Cliffside Unit 6 air permit.

Duke Energy Carolinas Dan River and Buck Combined Cycle Facilities. In June 2008, the NCUC issued its order approving the Certificate of Public Convenience and Necessity (CPCN) applications to construct a 620 MW combined cycle natural gas fired generating facility at each of Duke Energy Carolinas’ existing Dan River Steam Station and Buck Steam Station. The Division of Air Quality (DAQ) issued a final air permit authorizing construction of the Buck and Dan River combined cycle natural gas-fired generating units in October 2008 and August 2009, respectively.

The Buck project is expected to begin operation by the end of 2011. The Dan River project is expected to begin operation by the end of 2012. Based on the most updated cost estimates, total costs (including AFUDC) for the Buck and Dan River projects are $700 million and $716 million, respectively.

Duke Energy Indiana Edwardsport IGCC Plant.On September 7, 2006, Duke Energy Indiana and Southern Indiana Gas and Electric Company d/b/a Vectren Energy Delivery of Indiana (Vectren) filed a joint petition with the IURC seeking a CPCN for the construction of a 618 MW IGCC power plant at Duke Energy Indiana’s Edwardsport Generating Station in Knox County, Indiana. The facility was initially estimated to cost approximately $1.985 billion (including $120 million of AFUDC). In August 2007, Vectren formally withdrew its participation in the IGCC plant and a hearing was conducted on the CPCN petition based on Duke Energy Indiana owning 100% of the project. On November 20, 2007, the IURC issued an order granting Duke Energy Indiana a CPCN for the proposed IGCC project, approved the cost estimate of $1.985 billion and approved the timely recovery of costs related to the project. On January 25, 2008, Duke Energy Indiana received the final air permit from the Indiana Department of Environmental Management. The Citizens Action Coalition of Indiana, Inc. (CAC), Sierra Club, Inc., Save the Valley, Inc., and Valley Watch, Inc., all intervenors in the CPCN proceeding, have appealed the air permit.

On May 1, 2008, Duke Energy Indiana filed its first semi-annual IGCC rider and ongoing review proceeding with the IURC as required under the CPCN order issued by the IURC. In its filing, Duke Energy Indiana requested approval of a new cost estimate for the IGCC project of $2.35 billion (including $125 million of AFUDC) and for approval of plans to study carbon capture as required by the IURC’s CPCN order. On January 7, 2009, the IURC approved Duke Energy Indiana’s request, including the new cost estimate of $2.35 billion, and cost recovery associated with a study on carbon capture. Duke Energy Indiana was required to file its plans for studying carbon storage related to the project within 60 days of the order. On November 3, 2008 and May 1, 2009, Duke Energy Indiana filed its second and third semi-annual IGCC riders, respectively, both of which were approved by the IURC in full.

On November 24, 2009, Duke Energy Indiana filed a petition for its fourth semi-annual IGCC rider and ongoing review proceeding with the IURC. As Duke Energy Indiana experienced design modifications and scope growth above what was anticipated from the preliminary engineering design, capital costs to the IGCC project were anticipated to increase. Duke Energy Indiana forecasted that the additional capital cost items would use the remaining contingency and escalation amounts in the current $2.35 billion cost estimate and add $150 million, excluding the impact associated with the need to add more contingency. Duke Energy Indiana did not request approval of an increased cost estimate in the fourth semi-annual update proceeding; rather, Duke Energy Indiana requested, and the IURC approved, a subdocket proceeding in which Duke Energy Indiana would present additional evidence regarding an updated estimated cost for the IGCC project and in which a more comprehensive review of the IGCC project could occur. The evidentiary hearing for the fourth semi-annual update proceeding was held April 6, 2010, and an interim order was received on July 28, 2010. The order approves the implementation of an updated IGCC rider to recover costs incurred through September 30, 2009, effective immediately. The approvals are on an interim basis pending the outcome of the sub-docket proceeding involving the revised cost estimate as discussed further below.

On April 16, 2011, Duke Energy Indiana filed a revised cost estimate for the IGCC project reflecting an estimated cost increase of $530 million on April 16, 2010, with its case-in-chief testimony in the subdocket proceeding.million. Duke Energy Indiana requested approval of the revised cost estimate of $2.88 billion (including $160 million of AFUDC), and for continuation of the existing cost recovery treatment. A major driver of the cost increase included design changes reflected in the final engineering leading to increased scope and complexity. On September 17, 2010 an agreement was reached with the OUCC, Duke Energy Indiana Industrial Group and Nucor Steel – Indiana to increase the authorized cost estimate of $2.35 billion to $2.76 billion, and to cap the project’s costs that could be passed on to customers at $2.975 billion. Any construction cost amounts above $2.76 billion would be subject to a prudence review similar to most other rate base investments in Duke Energy Indiana’s next general rate increase request before the IURC. Duke Energy Indiana agreed to accept a 150 basis point reduction in the equity return for any project construction costs greater than $2.35 billion. Additionally, Duke Energy Indiana agreed not to file for a general rate case

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increase before March 2012. Duke Energy Indiana also agreed to reduce depreciation rates earlier than would otherwise be required and to forego a deferred tax incentive related to the IGCC project. As a result of the settlement, Duke Energy Indiana recorded a pre-tax charge to earnings of approximately $44 million in the third quarter of 2010 to reflect the impact of the reduction in the return on equity. The charge is recorded in Goodwill and other impairment charges on Duke Energy’s Condensed Consolidated Statement of Operations. This charge is recorded in Impairment charges on Duke Energy Indiana’s Condensed Consolidated Statements of Operations. Due to the IURC investigation discussed below, the IURC convened a technical conference on November 3, 2010 related to the continuing need for the Edwardsport IGCC facility.

On December 9, 2010, the parties to the settlement withdrew the settlement agreement to provide an opportunity to assess whether and to what extent the settlement agreement remained a reasonable allocation of risks and rewards and whether modifications to the settlement agreement were appropriate. Management determined that the approximate $44 million charge discussed above was not impacted by the withdrawal of the settlement agreement.

Additionally, the CAC, Sierra Club, Inc., Save the Valley, Inc., and Valley Watch, Inc. filed motions for two subdocket proceedings alleging improper communications, undue influence, fraud, concealment and gross mismanagement, and a request for field hearing in this proceeding. Duke Energy Indiana opposed the requests. The IURC held two field hearings on February 28, 2011 and March 2, 2011, which provided an opportunity for the public to comment on the proceeding. During 2010, Duke Energy Indiana filed petitions for its fifth and sixth semi-annual IGCC riders. Evidentiary hearings are set for November 2011.17, 2011 and November 21, 2011, respectively.

In January 2011, Duke Energy Indiana filed a motion with the IURC proposing an updated procedural schedule to address the undue influence issues described above. On February 25, 2011, the IURC issued an order which denied the request for a subdocket to investigate the allegations of improper communications and undue influence at this time, finding there were other agencies better suited for such investigation. The IURC also found that allegations of fraud, concealment and gross mismanagement related to the IGCC project should be heard in a Phase II proceeding of the cost estimate subdocket and set evidentiary hearings on both Phase I (cost estimate increase) and Phase II beginning in August 2011. In April 2011, after an attorneys’ conference, and in response to the other parties’ request for more time, the IURC scheduled hearings for Phase I to begin October 26, 2011 and Phase II hearings to begin November 3, 2011.

On March 10, 2011, Duke Energy Indiana filed testimony with the IURC proposing a framework designed to mitigate customer rate impacts associated with the Edwardsport IGCC project. Duke Energy Indiana’s filing proposed a cap on the project’s construction costs, (excluding financing costs), which can be recovered through rates at $2.72 billion. It also proposed rate-related adjustments that will lower the overall customer rate increase related to the project from an average of 19% to approximately 16%. The proposal is subject to the approval of the IURC in the Phase I hearings.

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On June 27, 2011, Duke Energy Indiana filed testimony with the IURC in connection with its seventh semi-annual rider request which included an update on the current cost forecast of the Edwardsport project. The evidentiary hearing is set for December 13, 2011. The updated forecast excluding AFUDC has increased from $2.72 billion to $2.82 billion, not including any contingency for unexpected start-up events. Notwithstanding the revised forecast, Duke Energy Indiana has not increased its previous cost estimate of $2.72 billion (excluding AFUDC) because Duke Energy Indiana believes it is probable that it will be able to mitigate these incremental costs. The increased project cost forecast of approximately $100 million consists of labor productivity trends. Duke Energy Indiana also forecasted a potential additional $30 million for start-up event risk and an increase of approximately $115 million for AFUDC financing costs resulting from the delay in Construction Work in Progress (CWIP) rider proceedings that have not been processed and approved to date. Additional updates to the cost estimate could occur through the completion of the plant in 2012.

On June 30, 2011, the OUCC and intervenors filed testimony in Phase I recommending that Duke Energy Indiana be disallowed cost recovery of any of the additional cost estimate increase above the previously approved cost estimate of $2.35 billion. Duke Energy Indiana filed rebuttal testimony on August 3, 2011.

On July 14, 2011, the OUCC and certain intervenors filed testimony in Phase II alleging that Duke Energy Indiana concealed information and grossly mismanaged the project, and therefore Duke Energy Indiana should only be permitted to recover from customers $1.985 billion, the original IGCC project cost estimate approved by the Commission.IURC. Other intervenors recommended that Duke Energy Indiana not be able to rely on any cost recovery granted under the CPCN or the first cost increase order. Duke Energy Indiana believes it has diligently and prudently managed the project. On September 9, 2011, Duke Energy defended against the allegations in its responsive testimony. The OUCC and intervenors filed their final rebuttal testimony in Phase II on or before October 7, 2011, making similar claims of fraud, concealment and gross mismanagement and recommending the same outcome of limiting Duke Energy Indiana’s recovery to the $1.985 billion initial cost estimate. Additionally, the CAC parties recommended that recovery be limited to the costs incurred on the IGCC project as of November 30, 2009 (Duke Energy Indiana estimates it had committed costs of $1.6 billion), with further IURC proceedings to be held to determine the financial consequences of this recommendation.

On October 19, 2011, Duke Energy revised its project cost estimate from approximately $2.72 billion, excluding financing costs, to approximately $2.98 billion, excluding financing costs. The revised estimate reflects additional cost pressures resulting from unfavorable labor productivity trends and incremental material quantity and scope changes. Duke Energy Indiana previously proposed to the IURC a cost cap of approximately $2.72 billion, plus the actual AFUDC that accrues on that amount. As a result, for the quarter ended September 30, 2011, Duke Energy Indiana recorded a pre-tax impairment charge of approximately $222 million related to costs expected to be incurred above the cost cap. This charge is in addition to a pre-tax impairment charge of approximately $44 million recorded in the third quarter of 2010 as discussed above. The approximate $222 million charge is recorded in Goodwill and other impairment charges on Duke Energy’s Condensed Consolidated Statement of Operations, and in Impairment charges on Duke Energy Indiana’s Condensed Consolidated Statements of Operations. The cost cap, if approved by the IURC, limits the amount of project construction costs that may be incorporated into customer rates in Indiana. As a result of the proposed cost cap, recovery of these cost increases is not considered probable. Additional updates to the cost estimate could occur through the completion of the plant in 2012.

On October 26, 2011, hearings before the IURC commenced pursuant to the previously established schedule and will defend against these allegations in responsive testimony due September 9, 2011.continue until all evidence is presented for both Phase I and Phase II.

Duke Energy is unable to predict the ultimate outcome of these proceedings. In the event the IURC disallows a portion of the plant costs, including financing costs, additional charges to expense could occur.An order is expected in the first quarter of 2012.

Construction of the Edwardsport IGCC plant is ongoing and is currently expected to be completed and placed in-service in 2012.

Duke Energy Indiana Carbon Sequestration. Duke Energy Indiana filed a petition with the IURC requesting approval of its plans for studying carbon storage, sequestration and/or enhanced oil recovery for the carbon dioxide (CO2) from the Edwardsport IGCC facility on March 6, 2009. On July 7, 2009, Duke Energy Indiana filed its case-in-chief testimony requesting approval for cost recovery of a $121 million site assessment and characterization plan for CO2 sequestration options including deep saline sequestration, depleted oil and gas sequestration and enhanced oil recovery for the CO2 from the Edwardsport IGCC facility. The OUCC filed testimony supportive of the continuing study of carbon storage, but recommended that Duke Energy Indiana break its plan into phases, recommending approval of only $33 million in expenditures at this time and deferral of expenditures rather than cost recovery through a tracking mechanism as proposed by Duke Energy Indiana. The CAC, an intervenor, recommended against approval of the carbon storage plan stating customers should not be required to pay for research and development costs. Duke Energy Indiana’s rebuttal testimony was filed October 30, 2009, wherein it amended its request to seek deferral of $42 million to cover the carbon storage site assessment and characterization activities scheduled to occur through the end of 2010, with further required study expenditures subject to future IURC proceedings. An evidentiary hearing was held on November 9, 2009, and an order is expected by the end of 2011.

Duke Energy Indiana IURC Investigation. On October 5, 2010, the Governor of Indiana terminated the employment of the Chairman of the IURC in connection with Duke Energy Indiana’s hiring of an attorney from the IURC staff. As requested by the governor, the Indiana Inspector General initiated an investigation into whether the IURC attorney violated any state ethics rules, and the IURC announced it would internally audit the Duke Energy Indiana cases dating from January 1, 2010 through September 30, 2010, on which this attorney worked while at the IURC, which includes the Indiana storm costs deferral request discussed above, as well as all Edwardsport IGCC cases dating back to 2006. Duke Energy Indiana engaged an outside law firm to conduct its own investigation regarding Duke Energy Indiana’s hiring of an IURC attorney and Duke Energy Indiana’s related hiring practices. On October 5, 2010, Duke Energy Indiana placed the attorney and President of Duke Energy Indiana on administrative leave. They were subsequently terminated on November 8, 2010. On December 7, 2010, the IURC released its internal audit findings concluding that the previous rulings were supported by sound, legal reasoning consistent with the Indiana Rules of Evidence and historical practice and procedures of the IURC and that the previous rulings appeared to be balanced and consistent among the parties. The audit concluded it did not reveal any bias or a resultant unfair advantage obtained by Duke Energy Indiana as a result of the evidentiary rulings of the former IURC attorney. As noted above, in the storm cost deferral case, the IURC found no conflict between the order and the staff report; however, the audit report noted the staff report offered no specific recommendation to either approve or deny the requested relief and that this was the only order that was subject to an appeal. As

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such, the IURC reopened that proceeding for further review and consideration of the evidence presented. The Inspector General’s investigation into whether the former IURC attorney violated any state ethics rules was the subject of an Indiana Ethics Commission hearing that was held on April 14, 2011, and a final report was issued on May 14, 2011. The final report pertained only to the conduct of the former IURC attorney as Duke Energy Indiana was not a subject of the investigation.

Other Matters.

Duke Energy Ohio and Duke Energy Kentucky Regional Transmission Organization.Organization Realignment.Duke Energy Ohio, which includes its wholly-owned subsidiary Duke Energy Kentucky, is in the advanced planning stages to transfer control of its transmission assets to effect a Regional Transmission Organization (RTO) realignment from the Midwest ISO to PJM Interconnection, LLC (PJM), effective January 1, 2012.

The FERC issued an order which approved Duke Energy Ohio and Duke Energy Kentucky’s RTO realignment request on October 21, 2010, and authorized Duke Energy Ohio and Duke Energy Kentucky to terminate their existing obligations to the Midwest ISO, subject to certain conditions.

In a related FERC proceeding, on December 16, 2010, FERC issued an order related to the Midwest ISO’s cost allocation methodology surrounding Multi-Value Projects (MVP), a type of Midwest ISO transmission expansion cost. The Midwest ISO expects that MVP will fund the costs of large transmission projects designed to bring renewable generation from the upper Midwest to load centers in the eastern portion of the Midwest ISO footprint. It is expected that the Midwest ISO will approve MVP proposals with estimated project costs in excess of $5 billion by the date of Duke Energy Ohio’s planned exit from the Midwest ISO on December 31, 2011. These projects are expected to be undertaken by the constructing transmission owners from 2012 through 2020 with costs recovered through the Midwest ISO over the useful life of the projects. The order provides that a withdrawing transmission owner shall remain responsible for all financial obligations incurred while it was a member for the allocation of MVP costs to withdrawing transmission owners for projects approved by the Midwest ISO up to the date of the withdrawing transmission owners’ exit from the Midwest ISO. The basis for allocating such MVP costs will be the withdrawing transmission owners’ historical usage of the Midwest ISO system. Duke Energy Ohio, including Duke Energy Kentucky, has historically represented approximately five-percent of the Midwest ISO system. The impact of this order could result in a substantial increase in the Midwest ISO transmission expansion costs allocated to Duke Energy Ohio and Duke Energy Kentucky subsequent to a withdrawal from the Midwest ISO. Duke Energy Ohio and Duke Energy Kentucky, among other parties, sought rehearing of the FERC MVP order. On October 21, 2011, the FERC issued an order on rehearing in this matter largely affirming its original MVP order and conditionally accepting Midwest ISO’s compliance filing as well as determining that the MVP allocation methodology is consistent with cost causation principles and FERC precedent. The FERC also reiterated that it will not prejudge any settlement agreement between an RTO and a withdrawing transmission owner for fees that a withdrawing transmission owner owes to the RTO. The order further states that any such fees that a withdrawing transmission owner owes to an RTO are a matter for those parties to negotiate, subject to review by the FERC. The FERC also ruled that Duke Energy Ohio and Duke Energy Kentucky’s challenge of the Midwest ISO’s ability to allocate MVP costs to a withdrawing transmission owner is beyond the scope of this proceeding. The Order further stated that Midwest ISO’s tariff withdrawal language establishes that once cost responsibility for transmission upgrades is determined, withdrawing transmission owners retain any costs incurred prior to the withdrawal date. Duke Energy will continue to pursue its challenge in regards to this issue in the appropriate proceeding.

On October 14, 2011, Duke Energy Ohio and Duke Energy Kentucky filed an application with the FERC to establish new rates for transmission service under PJM’s Open Access Transmission Tariff. The new rates are expected to go into effect, subject to refund, on January 1, 2012. The FERC has not yet established a procedural schedule to review the filing but is expected to do so in the fourth quarter of 2011.

Duke Energy Ohio and Duke Energy Kentucky have entered into settlements or have received state regulatory approvals associated with the RTO realignment, including the recovery of MVP costs, if ultimately allocated to Duke Energy Ohio and Duke Energy Kentucky. On December 22, 2010, the KPSC issued an order granting approval of Duke Energy Kentucky’s request to effect the RTO realignment, subject to several conditions. The conditions accepted by Duke Energy Kentucky include a commitment to not seek to double-recover in a future rate case the transmission expansion fees that may be charged by the Midwest ISO and PJM in the same period or overlapping periods. On January 25, 2011, the KPSC issued an order stating that the order had been satisfied and is now unconditional. The order further requires Duke Energy Kentucky to submit to the KPSC internal procedures for the receipt and tracking of notices from PJM regarding customer requests to participate in PJM demand-response programs. Duke Energy Kentucky submitted its filing describing these internal procedures on March 30, 2011.

The FERC issued an order which approved Duke Energy Ohio and Duke Energy Kentucky’s RTO realignment request on October 21, 2010, and authorized Duke Energy Ohio and Duke Energy Kentucky to terminate their existing obligations to the Midwest ISO, subject to certain conditions. On December 16, 2010, FERC issued an order related to the Midwest ISO’s cost allocation methodology surrounding Multi-Value Projects (MVP), a type of Midwest ISO transmission expansion cost. The Midwest ISO expects that MVP will fund the costs of large transmission projects designed to bring renewable generation from the upper Midwest to load centers in the eastern portion of the Midwest ISO footprint. The order provides for the allocation of MVP costs to withdrawing transmission owners for projects approved by the Midwest ISO up to date of the withdrawing transmission owners’ exit from the Midwest ISO. The basis for allocating such MVP costs will be the withdrawing transmission owners’ historical usage of the Midwest ISO system. The impact of this order could result in a substantial increase in the Midwest ISO transmission expansion costs incurred by Duke Energy Ohio and Duke Energy Kentucky subsequent to a withdrawal from Midwest ISO. Duke Energy Ohio, among other parties, is seeking rehearing of the FERC MVP order.

On April 26, 2011, Duke Energy Ohio, Ohio Energy Group, The Office of Ohio Consumer’sConsumers’ Counsel and the Commission Staff filed an Application and a Stipulation with the PUCO regarding Duke Energy Ohio’s recovery of certain costs related to its proposed RTO realignment. The Stipulation is applicable to all retail jurisdictional customers in Duke Energy Ohio’s electric service area. Under the Stipulation, Duke Energy Ohio would recover thethrough retail portion ofrates all Midwest ISO MTEPTransmission Expansion Planning (MTEP) costs, including but not limited to MVP costs, throughdirectly or indirectly charged to Duke Energy Ohio via a non-bypassable rider. Duke Energy Ohio would not seek to recover any portion of the Midwest ISO exit obligation, PJM integration fees, or internal costs associated with the RTO realignment (estimated to be $20 million).realignment. Also, Duke Energy Ohio would not seek to recover the first $121 million of PJM transmission expansion costcosts from Ohio retail customers. On May 25, 2011, the Stipulation was approved by the PUCO. An application for rehearing filed by Ohio Partners for Affordable Energy was denied by the PUCO on July 15, 2011.

Duke Energy Ohio currently estimates the liability for its Midwest ISO exit obligation and share of MTEP costs, excluding MVP, will be approximately $90 million. The liability will be recorded within Other in Deferred credits and other liabilities on Duke Energy Ohio’s consolidated balance sheet upon exit from the Midwest ISO on December 31, 2011. Approximately $60 million of this amount will be recorded as a regulatory asset while the remainder will be recorded to Operation, maintenance and other in Duke Energy Ohio’s consolidated statement of operations. In addition to the above amounts, Duke Energy Ohio may also be responsible for costs associated with the Midwest ISO MVP projects. Duke Energy Ohio is contesting its obligation to pay for such costs. However, depending on the final outcome of this matter, Duke Energy Ohio could incur significant costs associated with MVP projects. The appropriate regulatory treatment will be pursued for any costs incurred in connection with the resolution of this matter.

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5. Commitments and Contingencies

Environmental

Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana are subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. These regulations can be changed from time to time, imposing new obligations on the Duke Energy Registrants.

The following environmental matters impact all of the Duke Energy Registrants.

Remediation Activities. The Duke Energy Registrants are responsible for environmental remediation at various contaminated sites. These include some properties that are part of ongoing operations and sites formerly owned or used by Duke Energy entities, such as historic manufactured gas plant (MGP) sites. Most of these sites were decommissioned in the 1960s. While a majority of the MGP by-products were sold off-site during the time period when the plants operated, some residuals remained on-site during plant decommissioning. Remediation activities typically focus on the containment, removal and/or the management of these by-products. In some cases, Duke Energy no longer owns the property. Managed in conjunction with relevant federal, state and local agencies, activities vary with site conditions and locations, remediation requirements, complexity and sharing of responsibility. If remediation activities involve statutory joint and several liability provisions, strict liability, or cost recovery or contribution actions, the Duke Energy Registrants could potentially be held responsible for contamination caused by other parties. In some instances, the Duke Energy Registrants may share liability associated with contamination with other potentially responsible parties, and may also benefit from insurance policies or contractual indemnities that cover some or all cleanup costs. Reserves associated with remediation activities at certain sites have been recorded and it is anticipated that additional costs associated with remediation activities at certain sites will be incurred in the future. All of these sites generally are managed in the normal course of business or affiliate operations.

The Duke Energy Registrants have accrued costs associated with remediation activities at some of its current and former sites, as well as other relevant environmental contingent liabilities. Management, in the normal course of business, continually assesses the nature and extent of known or potential environmental-related contingencies and records liabilities when losses become probable and are reasonably estimable. Costs associated with remediation activities within the Duke Energy Registrants’ operations are typically expensed unless regulatory recovery of the costs is deemed probable.

As of JuneSeptember 30, 2011, Duke Energy Ohio had a total reserve of $47$36 million, related to remediation work at certain MGP sites. Duke Energy Ohio has received an order from the PUCO to defer the costs incurred. As of September 30, 2011, Duke Energy Ohio has deferred $64 million of costs related to the MGP sites. The PUCO will rule on the recovery of these costs at a future proceeding. Management believes it is probable that additional liabilities will be incurred as work progresses at Ohio MGP sites; however, costs associated with future remediation cannot currently be reasonably estimated.

Clean Water Act 316(b). The Environmental Protection Agency (EPA) published its proposed cooling water intake structures rule on April 20, 2011, and public2011. Duke Energy submitted comments are due byon the proposed rule on August 18,16, 2011. The proposed rule advances one main approach and three alternatives. The main approach establishes aquatic protection requirements for existing facilities and new on-site facility additions that withdraw 2 million gallons or more of water per day from rivers, streams, lakes, reservoirs, estuaries, oceans, or other U.S. waters for cooling purposes. Based on the main approach proposed, most, if not all of the 23 coal and nuclear-fueled generating facilities in which the Duke Energy Registrants are either a whole or partial owner are likely affected sources. Additional sources, including some combined-cycle combustion turbine facilities, may also be impacted, at least for intake modifications.

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facilities, may also be impacted, at least for intake modifications.

The EPA has plans to finalize the 316(b) rule in July 2012. Compliance with portions of the rule could begin as early as 2015. Because of the wide range of potential outcomes, including the other three alternative proposals, the Duke Energy Registrants are unable to estimate its costs to comply at this time.

Clean Air Interstate Rule (CAIR) and the Cross-State Air Pollution Rule (CSAPR). The EPA finalized the CAIR in May 2005. The CAIR limits total annual and summertime nitrogen oxide (NOx) emissions and annual sulfur dioxide (SO2) emissions from electric generating facilities across the Eastern U.S. through a two-phased cap-and-trade program. Phase 1 began in 2009 for NOx and in 2010 for SO2. On July 11, 2008, the D.C. Circuit issued its decision inNorth Carolina v. EPA No. 05-1244 vacating the CAIR. In December 2008, as a result of a rehearing request from the EPA, the D.C. Circuit issued a decision remanding the CAIR to the EPA without vacatur which allowed the rule to remain in effect until EPA promulgated a replacement rule. On July 6,August 8, 2011, the EPA issuedpublished its final Cross-State Air Pollution Rule (CSAPR) in the final rule to replace CAIR, referred to as the CSAPR, (previously referred to as the Transport Rule).Federal Register. The CSAPR establishes state-level annual SO2 and NOx capsbudgets that take effect on January 1, 2012, and state-level ozone-season NOx capsbudgets that take effect on May 1, 2012.2012, and allocates emission allowances to affected sources in each state equal to the state budget less an allowance set-aside for new sources. The capbudget levels decline in 2014 for most states, including each state that the Duke Energy Registrants operate in, except for South Carolina where the capbudget levels remain constant. The rule allows intrastate and interstate allowance trading.

Considering the Duke Energy Registrants’ recent amountThe stringency of SO2 and NOx emissions compared with allocated emission allowances under CSAPR, Duke Energy Registrants will face varying degrees of challenges achieving either the 2012 orand 2014 CSAPR requirements. As such,requirements vary among the Duke Energy Registrants areand each is currently evaluating the most cost effective approach to achieveoptions for achieving the CSAPR requirements. ActivitiesWhere the CSAPR requirements will be constraining, activities being consideredevaluated to meet thesethe requirements include purchasing emission allowances, power purchases, and curtailing generation and utilizing low sulfur fuel to reduce levels of SO2 or NOx emitted. Theemissions. Technical adjustments to CSAPR trading restrictions coupled with lower than proposed SO2 and NOx allowance allocationsby the EPA in certain states (particularly SO2 allowances in Ohio and Indiana), will addOctober 2011, if finalized, are not expected to materially impact the Duke Energy’s cost of complying with the regulation.Energy Registrants. See Note 7 for further information regarding impairment of emissions allowances as a result of the CSAPR.

Coal Combustion Product (CCP) Management. Duke Energy currently estimates that it will spend $369 million ($131 million at Duke Energy Carolinas, $70 million at Duke Energy Ohio and $168 million at Duke Energy Indiana) over the period 2011-2015 to install synthetic caps and liners at existing and new CCP landfills and to convert some of its CCP handling systems from wet to dry systems to comply with current regulations. The EPA and a number of states are considering additional regulatory measures that will contain specific and more detailed requirements for the management and disposal of CCPs, primarily ash, from the Duke Energy Registrants’ coal-fired power plants.

On June 21, 2010, the EPA issued a proposal to regulate, under the Resource Conservation and Recovery Act, coal combustion residuals (CCR), a term the EPA uses to describe the CCPs associated with the generation of electricity. The EPA proposal contains two regulatory options whereby CCRs not employed in approved beneficial use applications would either be regulated as hazardous waste or would continue to be regulated as non-hazardous waste. Duke Energy cannot predict the outcome of this rulemaking. However, based on the proposal, the cost of complying with the final regulation will be significant. The EPA is not expected to issue a final rule until 2012 or later.

Utility Boiler Maximum Achievable Control Technology (MACT) Standards. On May 3, 2011, the proposed Utility MACT Standards rule was published in the federal register.Federal Register. The rule proposes to establish emission limits for hazardous air pollutants from coal-fired electric generating units, including mercury. TheOn October 24, 2011, the Court modified its earlier consent decree, giving the EPA plansuntil December 16, 2011, to finalize a rule in November 2011. Compliancethe MACT rule. Based on this date, compliance with the final emission limits will be required byin early 2015. Under2015, three years after the proposal,rule takes effect. The proposed rule gives permitting authorities have the discretion to grant up to a 1-year compliance extension, on a case-by-case basis, to sources that are unable to install emission controls before 2015.the three year compliance deadline. Duke Energy cannot predict the outcome of this rulemaking. However, based on the proposal, the cost of complying with the final regulation will be significant.

Litigation

Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana

New Source Review (NSR). In 1999-2000, the DOJ, acting on behalf of the EPA and joined by various citizen groups and states, filed a number of complaints and notices of violation against multiple utilities across the country for alleged violations of the NSR provisions of the Clean Air Act (CAA). Generally, the government alleges that projects performed at various coal-fired units were major modifications, as defined in the CAA, and that the utilities violated the CAA when they undertook those projects without obtaining permits and installing the best available emission controls for SO2, NOx and particulate matter. The complaints seek injunctive relief to require installation of pollution control technology on various generating units that allegedly violated the CAA, and unspecified civil penalties in amounts of up to $32,500 per day for each violation. A number of the Duke Energy Registrants’ plants have been subject to these allegations. The Duke Energy Registrants assert that there were no CAA violations because the applicable regulations do not require permitting in cases where the projects undertaken are “routine” or otherwise do not result in a net increase in emissions.

In 2000, the government brought a lawsuit against Duke Energy Carolinas in the U.S. District Court in Greensboro, North Carolina. The EPA claims that 29 projects performed at 25 of Duke Energy Carolinas’ coal-fired units violate these NSR provisions. Three environmental groups have intervened in the case. In August 2003, the trial court issued a summary judgment opinion adopting Duke Energy Carolinas’ legal positions on the standard to be used for measuring an increase in emissions, and granted judgment in favor of Duke Energy Carolinas. The trial court’s decision was appealed and ultimately reversed and remanded for trial by the U.S. Supreme Court. At trial, Duke Energy Carolinas will continue to assert that the projects were routine or not projected to increase emissions. On July 29, 2010, the district court issued an order on outstanding motions for summary judgment filed in response to the Supreme Court remand. The court vacated large portions of the previous trial court’s opinion in light of the Supreme Court ruling and found that Duke Energy Carolinas has the burden of proof for the Routine Maintenance Repair and Replacement exclusion, but that the exception must be viewed in light of industry practice, not only in light of an individual unit. The court also clarified that it will apply the “actual-to-projected-actual” emissions test to determine whether Duke Energy Carolinas should reasonably have sought a pre-project permit for any of the projects at issue. On February 11, 2011, the trial judge held an initial status conference and on March 22, 2011, the judge entered an interim scheduling order. IfThe parties have filed a stipulation in which the United States and Plaintiff-Intervenors have dismissed with prejudice 16 claims. In exchange, Duke Energy Carolinas dismissed certain affirmative defenses. The parties do not negotiate a resolution ofhave filed motions for summary judgment on the case, then motions to narrow the issues or resolve the case must be fully briefed by October 21, 2011.remaining claims. No trial date has been set, but a trial is not expected in 2011.

In November 1999, the U.S. brought a lawsuit in the U.S. Federal District Court for the Southern District of Indiana against Cinergy, Duke Energy Ohio, and Duke Energy Indiana alleging various violations of the CAA for various projects at six owned and co-owned generating stations in the Midwest. Three northeast states and two environmental groups intervened in the case. A jury verdict was returned on May 22, 2008. The jury found in favor of Cinergy, Duke Energy Ohio and Duke Energy Indiana on all but three units at Duke Energy Indiana’s Wabash River Station, including Duke Energy Indiana’s Gallagher Station units discussed below. Additionally, the plaintiffs had claimed that these were a violation of an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s State Implementation Plan provisions governing particulate matter at Duke Energy Ohio’s W.C. Beckjord Station. On May 29, 2009, the court issued its remedy ruling for violations previously established at the Wabash River and W.C. Beckjord Stations and

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ordered the following relief: (i) Wabash River Units 2, 3 and 5 to be permanently retired by September 30, 2009; (ii) surrender of SO2 allowances equal to the emissions from Wabash River Units 2, 3 and 5 from May 22, 2008 through September 30, 2009; (iii) civil penalty in the amount of $687,500 for W.C. Beckjord violations; and (iv) installation of a particulate continuous emissions monitoring system at W.C. Beckjord Units 1 and 2. The civil penalty has been paid. On October 12, 2010, the Seventh Circuit Court of Appeals issued a decision reversing the trial court and ordered issuance of judgment in favor of Cinergy (USA v. Cinergy), which includes Duke Energy Indiana and

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Duke Energy Ohio. The plaintiff’s motion for rehearing was denied on December 29, 2010. On January 6, 2011, the mandate from the Seventh Circuit was issued returning the case to the District Court and on April 15, 2011, the District Court issued its Final Amended Judgment in favor of Cinergy. Plaintiffs did not file a petition for certiorari with the United State Supreme Court prior to the March 29, 2011 filing deadline. This ruling allowed Wabash River Units 2, 3 and 5 to be placed back into service.

Regarding the Gallagher Station units, on October 21, 2008, plaintiffs filed a motion for a new liability trial claiming that defendants misled the plaintiffs and the jury by, among other things, not disclosing a consulting agreement with a fact witness and by referring to that witness as “retired” during the liability trial when in fact he was working for Duke Energy Indiana under the referenced consulting agreement in connection with the trial. On December 18, 2008, the court granted plaintiffs’ motion for a new liability trial on claims for which Duke Energy Indiana was not previously found liable. On May 19, 2009, the jury announced its verdict finding in favor of Duke Energy Indiana on four of the remaining six projects at issue. The two projects in which the jury found violations were undertaken at Gallagher Station Units 1 and 3. The parties to the remedy trial reached a negotiated agreement on those issues and filed a proposed consent decree with the court, which was approved and entered on March 18, 2010. The substantive terms of the proposed consent decree require: (i) conversion of Gallagher Station Units 1 and 3 to natural gas combustion by 2013 (or retirement of the units by February 2012); (ii) installation of additional pollution controls at Gallagher Station Units 2 and 4 by 2011; and (iii) additional environmental projects, payments and penalties. Duke Energy Indiana estimates that these and other actions in the settlement will cost $88 million. Due to the NSR remedy order and consent decree, Duke Energy Indiana has requested several approvals from the IURC including approval to add a dry sorbent injection system on Gallagher Station Units 2 and 4, approval to convert to natural gas or retire Gallagher Station Units 1 and 3, and approval to recover expenses for certain SO2 emission allowance expenses required to be surrendered. On September 8, 2010, the IURC approved the implementation of the dry sorbent injection system. On September 28, 2010, Duke Energy Indiana filed a petition requesting the recovery of costs associated with the Gallagher consent decree. Testimony in support of the petition was filed in early December 2010. Duke Energy Indiana subsequently requested the IURC suspend the procedural schedule to allow it time to do a solicitation for capacity options to compare to the proposed conversion of Gallagher Units 1 and 3 to natural gas.

On May 26, 2011, Duke Energy Indiana filed testimony seeking approval of the purchase of a portion of the Vermillion Generating Station from its affiliate, Duke Energy Vermillion II, LLC, an indirect wholly-owned subsidiary of Duke Energy Ohio. Refer to Note 3 for further information on the Vermillion transaction. As a result of the proposed purchase, Duke Energy Indiana may retire Gallagher Units 1 and 3. The approval of the Vermillion transaction by the FERC and IURC under terms acceptable to Duke Energy Indiana is a condition to the closing of the transaction and the option of converting Gallagher Units 1 and 3 to gas is being preserved until such approvals have been obtained. A new procedural schedule has been set providing for aOn August 12, 2011, the FERC approved the Vermillion transaction. An IURC hearing was held in September 2011 with an order expected in the fourth quarter of 2011.

On April 3, 2008, the Sierra Club filed another lawsuit in the U.S. District Court for the Southern District of Indiana against Duke Energy Indiana and certain affiliated companies alleging CAA violations at Edwardsport Station. On October 20, 2009, the defendants filed a motion for summary judgment alleging that the applicable statute of limitations bars all of the plaintiffs’ claims. On September 14, 2010, the Court granted defendants’ motion for summary judgment in its entirety; however, entry of final judgment was stayed pending a decision from the Seventh Circuit Court of Appeals inUSA v. Cinergy, referenced above, on a similar and potentially dispositive statute of limitations issue pending before that court. On October 12, 2010, the Seventh Circuit issued its decision inUSA v. Cinergy in which the court ruled in favor of Cinergy and declined to address the referenced statute of limitations issue. The Seventh circuit issued its mandate on January 6, 2011 and the District Court issued final judgment in favor of Duke Energy Indiana on March 1, 2011. On March 2, 2011, the Sierra Club agreed not to pursue an appeal of the case in exchange for Duke Energy Indiana’s waiver of its right to seek reimbursement of costs.

It is not possible to estimate the damages, if any, that might be incurred in connection with the unresolved matters discussed above. Ultimate resolution of these matters could have a material adverse effect on the Duke Energy Registrants’ consolidated results of operations, cash flows or financial position. However, the appropriate regulatory treatment will be pursued for any costs incurred in connection with such resolution.

Duke Energy

CO2 Litigation.In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin and the City of New York brought a lawsuit in the U.S. District Court for the Southern District of New York against Cinergy, AEP, American Electric Power Service Corporation, Southern Company, Tennessee Valley Authority, and Xcel Energy Inc. A similar lawsuit was filed in the U.S. District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance. The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2. The plaintiffs arewere seeking an injunction requiring each defendant to cap its CO2emissions and then reduce them by a specified percentage each year for at least a decade. In September 2005, the District Court granted the defendants’ motion to dismiss the lawsuit. The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals. Oral arguments were held before the Second Circuit Court of Appeals on June 7, 2006. In September 2009, the Court of Appeals issued an opinion reversing the district court and reinstating the lawsuit. Defendants filed a petition for rehearing en banc, which was subsequently denied. Defendants filed a petition for certiorari to the U.S. Supreme Court on August 2, 2010. The Solicitor General filed a brief in which it agreed that the matter should have been dismissed but raised different arguments than did the defendants. On December 6, 2010, the Supreme Court granted certiorari. Argument on this matter was held on April 19, 2011. On June 20, 2011, the Supreme Court held that the Second Court of Appeals decision should be reversed on the basis that plaintiffs’ claims cannot proceed under federal common law, which was displaced by the CAA and actual or potential EPA regulations. The Court’s decision did not address plaintiffs’ state law claims as those claims had not been presented. The case was remandedOn September 2, 2011, plaintiffs notified the Court that they had decided to withdraw their complaints. This effectively ends the district court for further proceedings.proceedings in this case.

Alaskan Global Warming Lawsuit. On February 26, 2008, plaintiffs, the governing bodies of an Inupiat village in Alaska, filed suit in the U.S. Federal Court for the Northern District of California against Peabody Coal and various oil and power company defendants, including Duke Energy and certain of its subsidiaries. Plaintiffs brought the action on their own behalf and on behalf of the village’s 400 residents. The lawsuit alleges that defendants’ emissions of CO2contributed to global warming and constitute a private and public nuisance. Plaintiffs also allege that certain defendants, including Duke Energy, conspired to mislead the public with respect to global warming. Plaintiffs seek

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unspecified monetary damages, attorney’s fees and expenses. On June 30, 2008, the defendants filed a motion to dismiss on jurisdictional grounds, together with a motion to dismiss the conspiracy claims. On October 15, 2009, the District Court granted defendants motion to dismiss. The plaintiffs filed a notice of appeal and briefing is complete. By Order dated February 23, 2011, the Court stayed oral argument in this case pending the Supreme Court’s ruling in the CO2litigation discussed above. Following the Supreme Court’s June 20, 2011 decision the Ninth Circuit Court of Appeals was informed of the decision and thatset the case was ready for hearing or further briefing.argument on November 28, 2011. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

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Price Reporting Cases. A total of five lawsuits were filed against Duke Energy affiliates and other energy companies and remain pending in a consolidated, single federal court proceeding in Nevada.

In November 2009, the judge granted defendants’ motion for reconsideration of the denial of defendants’ summary judgment motion in two of the remaining five cases to which Duke Energy affiliates are a party. A hearing on that motion occurred on July 15, 2011, and on July 19, 2011, the judge granted the motion for summary judgment. Plaintiffs have indicated that they will file anfiled a notice of appeal withto the U.S. Court of Appeals for the Ninth Circuit Court of Appeal.Circuit. In December 2009, plaintiffs in the consolidated cases filed a motion to amend their complaints in the individual cases to add a claim for treble damages under the Sherman Act, including additional factual allegations regarding fraudulent concealment of defendants’ allegedly conspiratorial conduct. Those motions were denied on October 29, 2010.

Each of these cases contains similar claims, that the respective plaintiffs, and the classes they claim to represent, were harmed by the defendants’ alleged manipulation of the natural gas markets by various means, including providing false information to natural gas trade publications and entering into unlawful arrangements and agreements in violation of the antitrust laws of the respective states. Plaintiffs seek damages in unspecified amounts. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with the remaining matters.

Duke Energy International Paranapanema Lawsuit. On July 16, 2008, Duke Energy International Geracao Paranapanema S.A. (DEIGP) filed a lawsuit in the Brazilian federal court challenging transmission fee assessments imposed under two new resolutions promulgated by the Brazilian electricity regulatory agency (ANEEL) (collectively, the Resolutions). The Resolutions purport to impose additional transmission fees (retroactive to July 1, 2004 and effective through June 30, 2009) on generation companies located in the State of São Paulo for utilization of the electric transmission system. The new charges are based upon a flat-fee that fails to take into account the locational usage by each generator. DEIGP’s additional assessment under these Resolutions amounts to approximately $69 million, inclusive of interest, through JuneSeptember 2011. Based on DEIGP’s continuing refusal to tender payment of the disputed sums, on April 1, 2009, ANEEL imposed an additional fine against DEIGP in the amount of $11$9 million. DEIGP filed a request to enjoin payment of the fine and for an expedited decision on the merits or, alternatively, an order requiring that all disputed sums be deposited in the court’s registry in lieu of direct payment to the distribution companies.

On June 30, 2009, the court issued a ruling in which it granted DEIGP’s request for injunction regarding the additional fine, but denied DEIGP’s request for an expedited decision on the original assessment or payment into the court registry. Under the court’s order, DEIGP was required to make installment payments on the original assessment directly to the distribution companies pending resolution on the merits. DEIGP filed an appeal and on August 28, 2009, the order was modified to allow DEIGP to deposit the disputed portion of each installment, which was most of the assessed amount, into an escrow account pending resolution on the merits. In the second quarter of 2009, Duke Energy recorded a pre-tax charge of $33 million associated with this matter.

Brazil Expansion Lawsuit.On August 9, 2011, the State of São Paulo filed a lawsuit in Brazilian state court against DEIGP based upon a claim that DEIGP is under a continuing obligation to expand installed generation capacity by 15% pursuant to a stock purchase agreement under which DEIGP purchased generation assets from the state. On August 10, 2011, a judge granted an ex parte injunction ordering DEIGP to present, within 60 days of service, a detailed expansion plan in satisfaction of the 15% obligation or face civil penalties in the amount of approximately $16,000 per day. Both DEIGP and ANEEL have previously taken a position that the 15% expansion obligation is no longer viable given the changes that have occurred in the electric energy sector since privatization of that sector. ANEEL has also stated that it is not within its jurisdiction to apply sanctions for failure to comply with the alleged expansion obligation. In September, 2011, DEIGP filed (i) a request for reconsideration of the injunction order with the original court; (ii) a request for stay of the order with the appellate court; (iii) an appeal of the order; and (iv) a substantive defense of the lawsuit in the original court. On September 29, 2011, DEIGP’s request for stay of the injunction was denied. The remaining requests for relief are pending. DEIGP plans to submit an expansion plan by the court ordered deadline of November 11, 2011.

Duke Energy Retirement Cash Balance Plan. A class action lawsuit was filed in federal court in South Carolina against Duke Energy and the Duke Energy Retirement Cash Balance Plan, alleging violations of Employee Retirement Income Security Act (ERISA) and the Age Discrimination in Employment Act (ADEA). These allegations arise out of the conversion of the Duke Energy Company Employees’ Retirement Plan into the Duke Energy Retirement Cash Balance Plan. The case also raises some Plan administration issues, alleging errors in the application of Plan provisions (i.e., the calculation of interest rate credits in 1997 and 1998 and the calculation of lump-sum distributions). Six causes of action were alleged, ranging from age discrimination, to various alleged ERISA violations, to allegations of breach of fiduciary duty. Plaintiffs sought a broad array of remedies, including a retroactive reformation of the Duke Energy Retirement Cash Balance Plan and a recalculation of participants’/ beneficiaries’ benefits under the revised and reformed plan. Duke Energy filed its answer in March 2006. A portion of this contingent liability was assigned to Spectra Energy Corp (Spectra Energy) in connection with the spin-off in January 2007. A hearing on the plaintiffs’ motion to amend the complaint to add an additional age discrimination claim, defendant’s motion to dismiss and the respective motions for summary judgment was held in December 2007. On June 2, 2008, the court issued its ruling denying plaintiffs’ motion to add the additional claim and dismissing a number of plaintiffs’ claims, including the claims for ERISA age discrimination. Subsequently, plaintiffs notified Duke Energy that they were withdrawing their ADEA claim. On September 4, 2009, the court issued its order certifying classes for three of the remaining claims but not certifying their claims as to plaintiffs’ fiduciary duty claims. At an unsuccessful mediation in September 2008, Plaintiffs quantified their claims as being in excess of $150 million. After mediation on September 21, 2010, the parties reached an agreement in principle to settle the lawsuit, subject to execution of a definitive settlement agreement, notice to the class members and approval of the settlement by the Court. In the third quarter of 2010, Duke Energy recorded a provision related to the settlement agreement. At a hearing on May 16, 2011, the court issued its final confirmation order and payments will behave been made in accordance with the settlement agreement.

Crescent Litigation. On September 3, 2010, the Crescent Resources Litigation Trust filed suit against Duke Energy along with various affiliates and several individuals, including current and former employees of Duke Energy, in the U.S. Bankruptcy Court for the Western District of Texas. The Crescent Resources Litigation Trust was established in May, 2010 pursuant to the plan of reorganization approved in the Crescent bankruptcy proceedings in the same court. The complaint alleges that in 2006 the defendants caused Crescent to borrow approximately $1.2 billion from a consortium of banks and immediately thereafter distribute most of the loan proceeds to Crescent’s parent company without benefit to Crescent. The complaint further alleges that Crescent was rendered insolvent by the transactions, and that the distribution is subject to recovery by the Crescent bankruptcy estate as an alleged fraudulent transfer. The plaintiff requests return of the funds as well as other statutory and equitable relief, punitive damages and attorneys’ fees. Duke Energy and its affiliated defendants believe that the referenced 2006 transactions were legitimate and did not violate any state or federal law. Defendants filed a motion to dismiss in December 2010. On March 21, 2011, the plaintiff filed a response to the defendant’s motion to dismiss and a motion for leave to file an amended complaint, which was granted. The Defendants filed a second motion to dismiss in response to plaintiffs’ amended complaint.

A hearing on the motion is scheduled forwas held on August 19,31, 2011. No trial date has been set. It is not possible to predict at this time whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this lawsuit.

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On October 14, 2010, a suit was filed in Mecklenburg County, North Carolina by a group of Duke Energy shareholders alleging breach of duty of loyalty and good faith by certain Duke Energy directors who were directors at the time of the 2006 Crescent transaction. On January 5, 2011, defendants filed a Notice of Designation of this case for the North Carolina Business Court. On July 22, 2011, the court granted the defendants’ motion to dismiss the lawsuit. It islawsuit and the plaintiffs did not possible to predict at this time whether Duke Energy will incur any liability or to estimateappeal the damages, if any, that Duke Energy might incur in connection with these lawsuits.ruling.

Progress Energy Merger Litigation. Duke Energy and Diamond Acquisition Corporation, a wholly owned subsidiary of Duke Energy have been named as defendants in 10 purported shareholder actions filed in North Carolina state court and two cases filed in federal court in

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North Carolina. The actions, which contain similar allegations, were brought by individual shareholders against the following defendants: Progress Energy, Duke Energy, Diamond Acquisition Corporation and Directors of Progress Energy. The lawsuits allege that the individual defendants breached their fiduciary duties to Progress Energy shareholders and that Duke Energy and Diamond Acquisition Corporation, aided and abetted the individual defendants. The plaintiffs seek damages and to enjoin the merger. One of the state court cases was voluntarily dismissed. On July 11, 2011, the parties to the remaining nine state court cases entered into a Memorandum of Understanding for a disclosure-based settlement of the litigation. On August 2, 2011, preliminary approval of the settlement was granted by the Court. An order approving the proposed settlement is expected in the fourth quarter of 2011.

The plaintiff in one of the federal court lawsuits filed a motion for voluntary withdrawal, leaving one federal case pending. The complaint in the federal action includes allegations that defendants violated federal securities laws in connection with the statements contained in Duke Energy’s Registration Statement on Form S-4, as amended, and is now subject to the notice requirements of the Private Securities Litigation Reform Act. Plaintiff’s counsel in the federal case have sent a total of four derivative demand letters to Progress Energy demanding that Progress Energy’s board of directors make certain disclosures, desist from moving forward with the merger and engage in an auction of the company. Progress Energy has indicated that it is evaluating those demands. On August 2,3, 2011, the Plaintiffs’ filedCourt issued a scheduling order granting the plaintiffs’ unopposed motion for preliminary approval of the proposed settlement. On October 27, 2011, a temporary restraining order, and for a preliminary injunction.hearing regarding the final approval of the proposed settlement was held.

Federal Advanced Clean Coal Tax Credits.Duke Energy has been awarded $125 million of federal advanced clean coal tax credits associated with its construction of Cliffside Unit 6 and $134 million of federal advanced clean coal tax credits associated with its construction of the Edwardsport IGCC plant. In March, 2008, two environmental groups, Appalachian Voices and the Canary Coalition, filed suit against the Federal government challenging the tax credits awarded to incentivize certain clean coal projects. Although Duke Energy was not a party to the case, the allegations center on the tax incentives provided for the Cliffside and Edwardsport projects. The initial complaint alleged a failure to comply with the National Environmental Policy Act. The first amended complaint, filed in August 2008, added an Endangered Species Act claim and also sought declaratory and injunctive relief against the DOE and the U.S. Department of the Treasury. In 2008, the District Court dismissed the case. On September 23, 2009, the District Court issued an order granting plaintiffs’ motion to amend their complaint and denying, as moot, the motion for reconsideration. Plaintiffs have filed their second amended complaint. The Federal government has moved to dismiss the second amended complaint; the motion is pending. On July 26, 2010, the District Court denied plaintiffs’ motion for preliminary injunction seeking to halt the issuance of the tax credits.

Duke Energy Carolinas

Duke Energy Carolinas Cliffside Unit 6 Permit. On July 16, 2008, the Southern Alliance for Clean Energy, Environmental Defense Fund, National Parks Conservation Association, Natural Resources Defenses Council, and Sierra Club (collectively referred to as Citizen Groups) filed suit in U.S District Court for the Western District of North Carolina alleging that Duke Energy Carolinas violated the CAA when it commenced construction of Cliffside Unit 6 without obtaining a determination that the MACT emission limits will be met for all prospective hazardous air emissions at that plant. The Citizen Groups claim the right to injunctive relief against further construction at the plant as well as civil penalties in the amount of up to $32,500 per day for each alleged violation. In July 2008, Duke Energy Carolinas voluntarily performed a MACT assessment of air emission controls planned for Cliffside Unit 6 and submitted the results to the Department of Environment and Natural Resources (DENR). On December 2, 2008, the Court granted summary judgment in favor of the Plaintiffs and entered judgment ordering Duke Energy Carolinas to initiate a MACT process before the DAQ. The court did not order an injunction against further construction, but retained jurisdiction to monitor the MACT proceedings. On December 4, 2008, Duke Energy Carolinas submitted its MACT filing and supporting information to the DAQ specifically seeking DAQ’s concurrence as a threshold matter that construction of Cliffside Unit 6 is not a major source subject to section 112 of the CAA and submitting a MACT determination application. Concurrent with the initiation of the MACT process, Duke Energy Carolinas filed a notice of appeal to the Fourth Circuit Court of Appeals of the Court’s December 2, 2008 order to reverse the Court’s determination that Duke Energy Carolinas violated the CAA. The DAQ issued the revised permit on March 13, 2009, finding that Cliffside Unit 6 is a minor source of HAPs and imposing operating conditions to assure that emissions stay below the major source threshold. Based upon DAQ’s minor-source determination, Duke Energy Carolinas filed a motion requesting that the court abstain from further action on the matter and dismiss the plaintiffs’ complaint. The court granted Duke Energy Carolinas motion to abstain and dismissed the plaintiffs’ complaint without prejudice, but also ordered Duke Energy Carolinas to pay the plaintiffs’ attorneys’ fees. On August 3, 2009, plaintiffs filed a notice of appeal of the court’s order and Duke Energy Carolinas likewise appealed on the grounds, among others, that the dismissal should have been with prejudice and the court should not have ordered payment of attorneys’ fees. The appeals have been consolidated. On April 14, 2011, the Fourth Circuit Court of Appeals affirmed the district court’s ruling awarding fees to defendants. Duke Energy Carolinas filed a request for rehearing, which was denied, on May 10, 2011.

Asbestos-related Injuries and Damages Claims. Duke Energy Carolinas has experienced numerous claims for indemnification and medical cost reimbursement relating to damages for bodily injuries alleged to have arisen from the exposure to or use of asbestos in connection with construction and maintenance activities conducted on its electric generation plants prior to 1985. As of JuneSeptember 30, 2011, there were 265271 asserted claims for non-malignant cases with the cumulative relief sought of up to $61$57 million, and 4353 asserted claims for malignant cases with the cumulative relief sought of up to $12$14 million. Based on Duke Energy Carolinas’ experience, it is expected that the ultimate resolution of most of these claims likely will be less than the amount claimed.

Amounts recognized as asbestos-related reserves related to Duke Energy Carolinas in the respective Condensed Consolidated Balance Sheets totaled $828$815 million and $853 million as of JuneSeptember 30, 2011 and December 31, 2010, respectively, and are classified in Other within Deferred Credits and Other Liabilities and Other within Current Liabilities. These reserves are based upon the minimum amount in Duke Energy Carolinas’ best estimate of the range of loss for current and future asbestos claims through 2030. Management believes that it is possible there will be additional claims filed against Duke Energy Carolinas after 2030. In light of the uncertainties inherent in a longer-term forecast, management does not believe that they can reasonably estimate the indemnity and medical costs that might be incurred after 2030 related to such potential claims. Asbestos-related loss estimates incorporate anticipated inflation, if applicable, and are recorded on an undiscounted basis. These reserves are based upon current estimates and are subject to greater uncertainty as the projection period lengthens. A significant upward or downward trend in the number of claims filed, the nature of the alleged injury, and the average cost of resolving each such claim could change our estimated liability, as could any substantial adverse or favorable verdict at trial. A federal legislative solution, further state tort reform or structured settlement transactions could also change the estimated liability. Given the uncertainties associated with projecting matters into the future and numerous other factors outside our control, management believes that it is possible Duke Energy Carolinas may incur asbestos liabilities in excess of the recorded reserves.

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Duke Energy Carolinas has a third-party insurance policy to cover certain losses related to asbestos-related injuries and damages above an aggregate self insured retention of $476 million. Duke Energy Carolinas’ cumulative payments began to exceed the self insurance retention on its insurance policy during the second quarter of 2008. Future payments up to the policy limit will be reimbursed by Duke Energy Carolinas’ third party insurance carrier. The insurance policy limit for potential future insurance recoveries for indemnification and medical cost claim payments is $1,005$968 million in excess of the self insured retention. Insurance recoveries of $813 million and $850 million related to this policy are

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classified in the respective Condensed Consolidated Balance Sheets in Other within Investments and Other Assets and Receivables as of both JuneSeptember 30, 2011 and December 31, 2010.2010, respectively. Duke Energy Carolinas is not aware of any uncertainties regarding the legal sufficiency of insurance claims. Management believes the insurance recovery asset is probable of recovery as the insurance carrier continues to have a strong financial strength rating.

Duke Energy Ohio

Antitrust Lawsuit. In January 2008, four plaintiffs, including individual, industrial and nonprofit customers, filed a lawsuit against Duke Energy Ohio in federal court in the Southern District of Ohio. Plaintiffs alleged that Duke Energy Ohio (then The Cincinnati Gas & Electric Company), conspired to provide inequitable and unfair price advantages for certain large business consumers by entering into non-public option agreements with such consumers in exchange for their withdrawal of challenges to Duke Energy Ohio’s pending RSP, which was implemented in early 2005. On March 31, 2009, the District Court granted Duke Energy Ohio’s motion to dismiss. Plaintiffs filed a motion to alter or set aside the judgment, which was denied by an order dated March 31, 2010. In April 2010, the plaintiffs filed their appeal of that order with the U.S. Court of Appeals for the Sixth Circuit. The matter is fully briefed and the parties are awaiting the scheduling of oral argument. It is not possible to predict at this time whether Duke Energy Ohio will incur any liability or to estimate the damages, if any, that Duke Energy Ohio might incur in connection with this lawsuit.

Duke Energy Indiana

Prosperity Mine, LLC. On October 12, 2009, Prosperity Mine, LLC (Prosperity) filed for arbitration under an Agreement for the Sale and Purchase of Coal dated October 30, 2008. The Agreement provided for sale by Prosperity and purchase by Duke Energy Indiana of 500,000 tons of coal per year, commencing on January 1, 2009 and continuing until December 31, 2014, unless sooner terminated under the terms of the Agreement. Duke Energy Indiana could terminate the Agreement if a force majeure event lasted more than three months. Prosperity declared a force majeure event on February 13, 2010 and, when Prosperity did not notify Duke Energy Indiana that the force majeure had ended; Duke Energy Indiana sent written notice of termination on May 14, 2010. Prosperity contends that the termination was improper and that it is owed damages, quantified at $88 million, for the full contractual volumes through 2014. On November 17, 2010, the arbitrators issued their decision, ruling in favor of Duke Energy Indiana on all counts. On January 7, 2011, Prosperity filed a lawsuit in Indiana state court alleging that the arbitrators exceeded their power and acted without authority and asking that the arbitrators’ award be vacated. The parties reached a commercial arrangement pursuant to which Prosperity agreed to dismiss the lawsuit.

Asbestos-related Injuries and Damages Claims. Duke Energy Indiana has been named as a defendant or co-defendant in lawsuits related to asbestos at its electric generating stations. The impact on Duke Energy Indiana’s consolidated results of operations, cash flows or financial position of these cases to date has not been material. Based on estimates under varying assumptions concerning uncertainties, such as, among others: (i) the number of contractors potentially exposed to asbestos during construction or maintenance of Duke Energy Indiana generating plants; (ii) the possible incidence of various illnesses among exposed workers, and (iii) the potential settlement costs without federal or other legislation that addresses asbestos tort actions, Duke Energy Indiana estimates that the range of reasonably possible exposure in existing and future suits over the foreseeable future is not material. This estimated range of exposure may change as additional settlements occur and claims are made and more case law is established.

Other Litigation and Legal Proceedings

The Duke Energy Registrants are involved in other legal, tax and regulatory proceedings arising in the ordinary course of business, some of which involve substantial amounts. Management believes that the final disposition of these proceedings will not have a material adverse effect on its consolidated results of operations, cash flows or financial position.

The Duke Energy Registrants have exposure to certain legal matters that are described herein. Duke Energy has recorded reserves, including reserves related to the aforementioned asbestos-related injuries and damages claims, of $840$830 million and $900 million as of JuneSeptember 30, 2011 and December 31, 2010, respectively, for these proceedings and exposures (the total of which is primarily related to Duke Energy Carolinas). These reserves represent management’s best estimate of probable loss as defined in the accounting guidance for contingencies. Duke Energy has insurance coverage for certain of these losses incurred. As of both JuneSeptember 30, 2011 and December 31, 2010, Duke Energy recognized $813 million and $850 million, respectively, of probable insurance recoveries related to these losses (the total of which is related to Duke Energy Carolinas).

The Duke Energy Registrants expense legal costs related to the defense of loss contingencies as incurred.

Other Commitments and Contingencies

General.As part of its normal business, the Duke Energy Registrants are a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the respective Condensed Consolidated Balance Sheets. The possibility of any of the Duke Energy Registrants having to honor their contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events.

In addition, the Duke Energy Registrants enter into various fixed-price, non-cancelable commitments to purchase or sell power (tolling arrangements or power purchase contracts), take-or-pay arrangements, transportation or throughput agreements and other contracts that may or may not be recognized on the respective Condensed Consolidated Balance Sheets. Some of these arrangements may be recognized at fair value on the respective Condensed Consolidated Balance Sheets if such contracts meet the definition of a derivative and the NPNS exception does not apply.

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6. Debt and Credit Facilities

Significant changes to the Duke Energy Registrants’ debt and credit facilities since December 31, 2010 are as follows:

Unsecured Debt.In August 2011, Duke Energy issued $500 million principal amount of senior notes, which carry a fixed interest rate of 3.55% and mature September 15, 2021. Proceeds from the issuance will be used to repay a portion of Duke Energy’s commercial paper as it matures, to fund capital expenditures in Duke Energy’s unregulated businesses in the U.S. and for general corporate purposes.

First Mortgage Bonds. In May 2011, Duke Energy Carolinas issued $500 million principal amount of first mortgage bonds, which carry a fixed interest rate of 3.90% and mature June 15, 2021. Proceeds from this issuance will bewere used to fund capital expenditures and for general corporate purposes.

Other Debt.In April 2011, Duke Energy filed a registration statement (Form S-3) with the SEC to sell up to $1 billion of variable denomination floating rate demand notes, called PremierNotes. The Form S-3 states that no more than $500 million of the notes will be outstanding at any particular time. The notes are offered on a continuous basis and bear interest at a floating rate per annum determined by the Duke Energy PremierNotes Committee, or its designee, on a weekly basis. The interest rate payable on notes held by an investor may vary based on the principal amount of the investment. The notes have no stated maturity date, but may be redeemed in whole or in part by

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Duke Energy at any time. The notes are non-transferable and may be redeemed in whole or in part at the investor’s option. Proceeds from the sale of the notes will be used for general corporate purposes. The balance as of JuneSeptember 30, 2011 is $5$30 million. The notes reflect a short-term debt obligation of Duke Energy and are reflected as Notes payable on Duke Energy’s Condensed Consolidated Balance Sheets.

At JuneSeptember 30, 2011, Duke Energy Carolinas had $750 million principal amount of 6.25% senior unsecured notes due January 2012 classified as Current maturities of long-term debt on Duke Energy Carolinas’ Condensed Consolidated Balance Sheets. At December 31, 2010, these notes were classified as Long-term Debt on Duke Energy Carolinas’ Condensed Consolidated Balance Sheets. Duke Energy Carolinas currently anticipates satisfying this obligation with proceeds from additional borrowings.

At September 30, 2011, Duke Energy Ohio had $500 million principal amount of 5.70% debentures due September 2012 classified as Current maturities of long-term debt on Duke Energy Ohio’s Condensed Consolidated Balance Sheets. At December 31, 2010, these notes were classified as Long-term Debt on Duke Energy Ohio’s Condensed Consolidated Balance Sheets. Duke Energy Ohio currently anticipates satisfying this obligation with proceeds from additional borrowings.

As discussed below, Duke Energy also issued an additional $450 million in Commercial Paper in the third quarter of 2011, for general corporate purposes, which is classified as Notes payable and commercial paper on Duke Energy’s Condensed Consolidated Balance Sheets.

Non-Recourse Notes Payable of VIEs.To fund the purchase of receivables, Cinergy Receivables borrows from third parties and such borrowings fluctuate based on the amount of receivables sold to Cinergy Receivables. The borrowings are secured by the assets of Cinergy Receivables and are non-recourse to Duke Energy. The debt is recorded as short-term becauseand Duke Energy extended the facility has an expiration date ofto October 2011; however, Duke Energy expects2012 subsequent to extend that expiration by one year prior to its current expiration.September 30, 2011. At JuneSeptember 30, 2011, Cinergy Receivables borrowings were $275 million and are reflected as Non-Recourse Notes Payable of VIEs on Duke Energy’s Condensed Consolidated Balance Sheets.

Money Pool. The Subsidiary Registrants receive support for their short-term borrowing needs through participation with Duke Energy and other Duke Energycertain of its subsidiaries in a money pool arrangement. Under this arrangement, those companies with short-term funds may provide short-term loans to affiliates participating under this arrangement. The money pool is structured such that the Subsidiary Registrants separately manage their cash needs and working capital requirements. Accordingly, there is no net settlement of receivables and payables related to the money pool between the money pool participants. Per the terms of the money pool arrangement, the parent companies, Duke Energy and Cinergy may loan funds to its participating subsidiaries, but may not borrow funds through the money pool. Accordingly, as the money pool activity is between Duke Energy and its wholly-owned subsidiaries, all money pool balances are eliminated within Duke Energy’s Condensed Consolidated Balance Sheets. The following table shows the Subsidiary Registrants’ money pool balances and classification within their respective Consolidated Balance Sheets as of JuneSeptember 30, 2011 and December 31, 2010:

 

  June 30, 2011   December 31, 2010   September 30, 2011   December 31, 2010 
  Receivables   Long-term Debt   Receivables   Long-term Debt   Receivables   Notes Payable   Long-term Debt   Receivables   Long-term Debt 
  (in millions)           (in millions)         

Duke Energy Carolinas

  $550    $300    $339    $300    $589    $—      $300    $339    $300  

Duke Energy Ohio

   394     —       480     —       259     —       —       480     —    

Duke Energy Indiana

   30     150     115     150     —       14     150     115     150  

Increases or decreases in money pool receivables are reflected within investing activities on the respective Subsidiary Registrants’ Condensed Consolidated Statements of Cash Flows, while increases or decreases in money pool borrowings are reflected within financing activities on the respective Subsidiary Registrants Condensed Consolidated Statements of Cash Flows.

Available Credit Facilities.The total capacity under Duke Energy’s master credit facility, which expires in June 2012, is $3.14 billion. The credit facility contains an option allowing borrowing up to the full amount of the facility on the day of initial expiration for up to one year. Duke Energy anticipates that it will begin the process of negotiating a renewal of the master credit facility in the third quarter of 2011. The Duke Energy Registrants each have borrowing capacity under the master credit facility up to specified sub limits for each borrower. However, Duke Energy has the unilateral ability at any time to increase or decrease the borrowing sub limits of each borrower, subject to per borrowera maximum cap limitations, at any time.sub limit for each borrower. See the table below for the borrowing sub limits for each of the borrowers as of JuneSeptember 30, 2011. The amount available under the master credit facility has been reduced, as indicated in the table below, by the use of the master credit facility to backstop the issuances of commercial paper, letters of credit and certain tax-exempt bonds. As indicated, borrowing sub limits for the Subsidiary Registrants are also reduced for amounts outstanding under the money pool arrangement.

Master Credit Facility Summary as of September 30, 2011 (in millions)(a)(b)

   Duke Energy  Duke Energy
Carolinas
  Duke Energy
Ohio
  Duke Energy
Indiana
  Total 

Facility Size(c)

  $1,097   $840   $750   $450   $3,137  

Less:

      

Notes Payable and Commercial Paper(d)

   (450  (300  —      (150  (900

Outstanding Letters of Credit

   (46  (7  (27  —      (80

Tax-Exempt Bonds

   (25  (95  (84  (81  (285
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Available Capacity

  $576   $438   $639   $219   $1,872  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Master Credit Facility Summary as of June 30, 2011 (in millions)(a)(b)

   Duke Energy  Duke  Energy
Carolinas
  Duke Energy
Ohio
  Duke Energy
Indiana
  Total 

Facility Size(c)

  $1,097   $840   $750   $450   $3,137  

Less:

      

Notes Payable and Commercial Paper(d)

   —      (300  —      (150  (450

Outstanding Letters of Credit

   (28  (7  (27  —      (62

Tax-Exempt Bonds

   (25  (95  (84  (81  (285
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Available Capacity

  $1,044   $438   $639   $219   $2,340  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)This summary only includes Duke Energy’s master credit facility and, accordingly, excludes certain demand facilities and committed facilities that are insignificant in size or which generally support very specific requirements, which primarily include facilities that backstop various outstanding tax-exempt bonds. These facilities that backstop various outstanding tax-exempt bonds generally have non-cancelable terms in excess of one year from the balance sheet date, such that the Duke Energy Registrants have the ability to refinance such borrowings on a long-term basis. Accordingly, such borrowings are reflected as Long-term Debt on the Condensed Consolidated Balance Sheets of the respective Duke Energy Registrant.
(b)Credit facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65% for each borrower.
(c)Represents the sub limit of each borrower at JuneSeptember 30, 2011. The Duke Energy Ohio sub limit includes $100 million for Duke Energy Kentucky.
(d)Duke Energy issued $450 million of Commercial Paper and loaned the proceeds through the money pool to Duke Energy Carolinas and Duke Energy Indiana (see money pool table above). The balances are classified as long-term borrowings within Long-term Debt in Duke Energy Carolinas’ and Duke Energy Indiana’s Condensed Consolidated Balance Sheets. Duke Energy issued an additional $450 million of Commercial Paper in the third quarter of 2011. The balance is classified as Notes payable and commercial paper on Duke Energy’s Condensed Consolidated Balance Sheets.

Duke Energy began negotiating a replacement of its master credit facility in October 2011. Duke Energy expects to execute a new five-year $6 billion master credit facility in the fourth quarter of 2011, with $4 billion available at closing and the remaining $2 billion available on or soon after the closing of the proposed merger with Progress Energy. The master credit facility will include borrowing sub limits for certain subsidiaries, similar to the current facility.

Restrictive Debt Covenants.The Duke Energy Registrants’ debt and credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of JuneSeptember 30, 2011, each of the Duke Energy Registrants was in compliance with all covenants related to its significant debt agreements. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. None of the significant debt or credit agreements contain material adverse change clauses.

7. Goodwill, Intangible Assets and Impairments

Goodwill

The following table shows goodwill by reportable operating segment for Duke Energy and Duke Energy Ohio at JuneSeptember 30, 2011, and December 31, 2010:

 

  USFE&G   Commercial Power International   Total   USFE&G   Commercial Power International Total 
  (in millions)   (in millions) 

Duke Energy

             

Balance at December 31, 2010:

             

Goodwill

  $3,483    $940   $306    $4,729    $3,483    $940   $306   $4,729  

Accumulated Impairment Charges

   —       (871  —       (871   —       (871  —      (871
  

 

   

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Balance at December 31, 2010, as adjusted for accumulated impairment charges

   3,483     69    306     3,858     3,483     69    306    3,858  

Foreign Exchange and Other Changes

   —       —      10     10     —       —      (11  (11
  

 

   

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Balance as of June 30, 2011:

       

Balance as of September 30, 2011:

      

Goodwill

   3,483     940    316     4,739     3,483     940    295    4,718  

Accumulated Impairment Charges

   —       (871  —       (871   —       (871  —      (871
  

 

   

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Balance at June 30, 2011, as adjusted for accumulated impairment charges, foreign exchange and other charges

  $3,483    $69   $316    $3,868  

Balance at September 30, 2011, as adjusted for accumulated impairment charges, foreign exchange and other charges

  $3,483    $69   $295   $3,847  
  

 

   

 

  

 

   

 

   

 

   

 

  

 

  

 

 

 

  USFE&G Commercial Power Total   USFE&G Commercial Power Total 
  (in millions)   (in millions) 

Duke Energy Ohio

        

Balance at December 31, 2010:

        

Goodwill

  $1,137   $1,188   $2,325    $1,137   $1,188   $2,325  

Accumulated Impairment Charges

   (216  (1,188  (1,404   (216  (1,188  (1,404
  

 

  

 

  

 

   

 

  

 

  

 

 

Balance at December 31, 2010, as adjusted for accumulated impairment charges

   921    —      921  

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

   USFE&G  Commercial Power  Total 
   (in millions) 

Balance at December 31, 2010, as adjusted for accumulated impairment charges

   921       921  
  

 

 

  

 

 

  

 

 

 

Balance as of June 30, 2011:

    

Goodwill

   1,137    1,188    2,325  

Accumulated Impairment Charges

   (216  (1,188  (1,404
  

 

 

  

 

 

  

 

 

 

Balance at June 30, 2011, as adjusted for accumulated impairment charges

  $921   $—     $921  
  

 

 

  

 

 

  

 

 

 
   USFE&G  Commercial Power  Total 
   (in millions) 

Balance as of September 30, 2011:

    

Goodwill

   1,137    1,188    2,325  

Accumulated Impairment Charges

   (216  (1,188  (1,404
  

 

 

  

 

 

  

 

 

 

Balance at September 30, 2011, as adjusted for accumulated impairment charges

  $921   $—     $921  
  

 

 

  

 

 

  

 

 

 

Duke Energy.Duke Energy is required to perform an annual goodwill impairment test as of the same date each year and, accordingly, performs its annual impairment testing of goodwill as of August 31. Duke Energy updates the test between annual tests if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Duke Energy early adopted the revised goodwill impairment accounting guidance during the third quarter of 2011 and applied this revised guidance to its August 31, 2011 annual goodwill impairment test. Pursuant to the revised guidance an entity may first assess qualitative factors to determine whether it is necessary to perform the two step goodwill impairment test. If deemed necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss, if any, to be recognized. Duke Energy’s qualitative assessment included, among other things, reviews of current forecasts and recent fair value calculations, updates to weighted average cost of capital calculations and consideration of overall economic factors and recent financial performance. Duke Energy determined it was more likely than not that the fair value of each of its reporting units exceeded their carrying value at August 31, 2011 and that the two step goodwill impairment test was not required.

In the second quarter of 2010, based on circumstances discussed below, management determined that it was more likely than not that the fair value of Commercial Power’s non-regulated Midwest generation reporting unit was below its respective carrying value. Accordingly, an interim impairment test was performed for this reporting unit. Determination of reporting unit fair value was based on a combination of the income approach, which estimates the fair value of Duke Energy’s reporting units based on discounted future cash flows, and the market approach, which estimates the fair value of Duke Energy’s reporting units based on market comparables within the utility and energy industries. Based on completion of step one of the second quarter 2010 impairment analysis, management determined that the fair value of Commercial Power’s non-regulated Midwest generation reporting unit was less than its carrying value, which included goodwill of $500 million.

Commercial Power’s non-regulated Midwest generation reporting unit includes nearly 4,000 MW of primarily coal-fired generation capacity in Ohio which is dedicated under the ESP through December 31, 2011. These assets also generate revenues through sales outside the ESP load customer base if circumstances arise that result in availability of excess capacity. Additionally, this reporting unit has approximately 3,600 MW of gas-fired generation capacity in Ohio, Pennsylvania, Illinois and Indiana which provides generation to unregulated energy markets in the Midwest. The businesses within Commercial Power’s non-regulated Midwest generation reporting unit operate in market structures that are, to a degree, unregulated and allow for customer choice among suppliers. As a result, the operations within this reporting unit are subjected to competitive pressures that do not exist in any of Duke Energy’s regulated jurisdictions.

Commercial Power’s other businesses, including the renewable generation assets, are in a separate reporting unit for goodwill impairment testing purposes. No impairment existed with respect to Commercial Power’s renewable generation assets.

The fair value of Commercial Power’s non-regulated Midwest generation reporting unit is impacted by a multitude of factors, including current and forecasted customer demand, forecasted power and commodity prices, uncertainty of environmental costs, competition, the cost of capital, valuation of peer companies and regulatory and legislative developments. Management’s assumptions and views of these factors continually evolve, and certain views and assumptions used in determining the fair value of the reporting unit in the 2010 interim impairment test changed significantly from those used in the 2009 annual impairment test. These factors had a significant impact on the valuation of Commercial Power’s non-regulated Midwest generation reporting unit. More specifically, the following factors significantly impacted management’s valuation of the reporting unit:

 

  

Sustained lower forward power prices—In Ohio, Duke Energy provides power to retail customers under the ESP, which utilizes rates approved by the PUCO through 2011. These rates in 2010 were above market prices for generation services, resulting in customers switching to other generation providers. As discussed in Note 4, Duke Energy Ohio will establish a new SSO for retail load customers for generation after the current ESP expires on December 31, 2011. Given forward power prices, which declined from the time of the 2009 impairment, significant uncertainty existed with respect to the generation margin that would be earned under the new SSO.

 

  

Potentially more stringent environmental regulations from the U.S. EPA—In May and July of 2010, the EPA issued proposed rules associated with the regulation of CCRs to address risks from the disposal of CCRs (e.g., ash ponds) and to limit the interstate transport of emissions of NOx and SO2. These proposed regulations, along with other pending EPA regulations, could result in significant expenditures for coal fired generation plants, and could result in the early retirement of certain generation assets, which do not currently have control equipment for NOx and SO2, as soon as 2015.

 

  

Customer switching—ESP customers have increasingly selected alternative generation service providers, as allowed by Ohio legislation, which further erodes margins on sales. In the second quarter of 2010, Duke Energy Ohio’s residential class became the target of an intense marketing campaign offering significant discounts to residential customers that switch to alternate power suppliers. Customer switching levels were at approximately 55% at June 30, 2010 compared to approximately 29% in the third quarter of 2009.

As a result of the factors above, a non-cash goodwill impairment charge of $500 million was recorded during the second quarter of 2010. This impairment charge represented the entire remaining goodwill balance for Commercial Power’s non-regulated Midwest generation reporting unit. In addition to the goodwill impairment charge, and as a result of factors similar to those described above, Commercial Power recorded $160 million of pre-tax impairment charges related to certain generating assets and emission allowances primarily associated with these generation assets in the Midwest to write-down the value of these assets to their estimated fair value. The generation assets that were subject to this impairment charge were those coal-fired generating assets that do not have certain environmental emissions control equipment, causing these generation assets to be heavily impacted by the EPA’s proposed rules on emissions of NOx and SO2. These impairment charges are recorded in Goodwill and Other Impairment Charges on Duke Energy’s Consolidated Statement of Operations.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

The fair values of Commercial Power’s non-regulated Midwest generation reporting unit and generating assets for which impairments were recorded were determined using significant unobservable inputs (i.e., Level 3 inputs) as defined by the accounting guidance for fair value measurements.

Duke Energy completed its annual goodwill impairment test for all reporting units as of August 31, 2010, and determined that no additional impairments exist.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Duke Energy Ohio.Duke Energy Ohio early adopted the revised goodwill impairment accounting guidance, discussed above, during the third quarter of 2011 and applied this revised guidance to its August 31, 2011 annual goodwill impairment test. Duke Energy Ohio’s qualitative assessment included, among other things, reviews of current forecasts and recent fair value calculations, updates to weighted average cost of capital calculations and consideration of overall economic factors and recent financial performance. Duke Energy Ohio determined it was more likely than not that the fair value of each of its reporting units exceeded their carrying value at August 31, 2011 and that the two step goodwill impairment test was not required.

In the second quarter of 2010, based on circumstances discussed above for Duke Energy, management determined that is was more likely than not that the fair value of Duke Energy Ohio’s non-regulated Midwest generation reporting unit was less than its carrying value. Accordingly, Duke Energy Ohio also impaired its entire goodwill balance of $461 million related to this reporting unit during the second quarter of 2010. Also, as discussed above, Duke Energy Ohio recorded $160 million of pre-tax impairment charges related to certain generating assets and emission allowances primarily associated with these generation assets in the Midwest to write-down the value of these assets to their estimated fair value.

In the second quarter of 2010, goodwill for Ohio Transmission and Distribution (Ohio T&D) was also analyzed. The fair value of the Ohio T&D reporting unit is impacted by a multitude of factors, including current and forecasted customer demand, discount rates, valuation of peer companies, and regulatory and legislative developments. Management periodically updates the load forecasts to reflect current trends and expectations based on the current environment and future assumptions. The spring and summer 2010 load forecast indicated that load would not return to 2007 weather-normalized levels for several more years. Based on the results of the second quarter 2010 impairment analysis, the fair value of the Ohio T&D reporting unit was $216 million below its book value at Duke Energy Ohio and $40 million higher than its book value at Duke Energy. Accordingly, this goodwill impairment charge was only recorded by Duke Energy Ohio.

The fair value of Duke Energy Ohio’s Ohio T&D reporting unit for which an impairment was recorded was determined using significant unobservable inputs (i.e., Level 3 inputs) as defined by the accounting guidance for fair value measurements.

As management is not aware of any recent market transactions for comparable assets with sufficient transparency to develop a market approach fair value, Duke Energy Ohio relied heavily on the income approach to estimate the fair value of the impaired assets.

All of the above impairment charges are recorded in Goodwill and Other Impairment Charges on Duke Energy Ohio’s Consolidated Statements of Operations.

Duke Energy Ohio completed its annual goodwill impairment test for all reporting units as of August 31, 2010, and determined that no additional impairments existed.

Intangible Assets. The net carrying amount of intangible assets as of June 30, 2011 and December 31, 2010 are as follows:

   June 30,
2011
   December 31,
2010
 
   (In millions) 

Duke Energy

  $468    $467  

Duke Energy Ohio

   234     248  

Duke Energy Indiana

   61     64  

The changes in net carrying amounts of intangible assets relates primarily to the consumption, purchases and/or sales of emission allowances during the six months ended June 30, 2011.

As discussed in Note 5, on July 6,On August 8, 2011, the EPA issued theEPA’s final rule to replace CAIR.CAIR was published in the Federal Register. As further discussed in Note 5, the CSAPR establishes state-level annual SO2 and NOx caps that take effect on January 1, 2012, and state-level ozone-season NOxcaps that take effect on May 1, 2012. The cap levels decline in 2014 for most states, including each state in which Duke Energy operates, except for South Carolina where the cap levels remain constant. The CSAPR will not utilize CAA emission allowances as the original CAIR provided. The EPA will issue new emission allowances to be used exclusively for purposes of complying with the CSAPR cap-and-trade program. Duke Energy is currently evaluatinghas evaluated the effect of the CSAPR on the carrying value of emission allowances recorded at its USFE&G and Commercial Power segments. Based on the provisions of the CSAPR, Duke Energy Ohio expects to havehas more SO2 allowances than will be needed to comply with the continuing CAA acid rain cap-and-trade program (excess emission allowances). Duke Energy Ohio expects to incurincurred a pre-tax impairment of approximately $80$79 million in the third quarter of 2011 to write down the carrying value of excess emission allowances held by Commercial Power to fair value. The charge is recorded in Goodwill and other impairment charges on Duke Energy and Duke Energy Ohio’s Condensed Consolidated Statement of Operations. This current estimateamount is based on the fair value of total allowances held by Commercial Power for compliance under the continuing CAA acid rain cap-and-trade program as of JuneSeptember 30, 2011.

The changes in net carrying amounts of intangible assets during the nine months ended September 30, 2011 relates primarily to the CSAPR impairments discussed above, as well as the consumption, purchases and/or sales of emission allowances.

Other Impairments.As a result of project cost overages related to the Edwardsport IGCC plant, Duke Energy Indiana recorded pre-tax charges to earnings of $222 million in the third quarter of 2011 and $44 million in the third quarter of 2010.

Refer to Note 4 for a further discussion of the Edwardsport IGCC project.

8. Risk Management, Derivative Instruments and Hedging Activities

The Duke Energy Registrants utilize various derivative instruments to manage risks primarily associated with commodity prices and interest rates. The primary use of energy commodity derivatives is to hedge the generation portfolio against exposure to changes in the prices of power and fuel. Interest rate derivatives are entered into to manage interest rate risk associated with variable-rate and fixed-rate borrowings.

Certain derivative instruments qualify for hedge accounting and are designated as either cash flow hedges or fair value hedges, while others either do not qualify as accounting hedges (such as economic hedges) or have not been designated as accounting hedges (hereinafter referred to as undesignated contracts). All derivative instruments not meeting the criteria for the normal purchase normal sale (NPNS) exception are recognized as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. As the regulated operations of the Duke Energy Registrants meet the criteria for regulatory accounting treatment, the majority of the derivative contracts entered into by the regulated operations are not designated as hedges since gains and losses on such contracts are deferred as regulatory liabilities and assets, respectively, thus there is no immediate earnings impact associated with changes in fair values of such derivative contracts.

For derivative instruments that qualify and are designated as cash flow hedges, the effective portion of the gain or loss is reported as a component of Accumulated Other Comprehensive Income (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gains or losses on the derivative that represent either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For derivative instruments that qualify and are designated as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item are recognized in earnings in the current period. Any gains or losses on the derivative are included in the same line item as the offsetting loss or gain on the hedged item in the Condensed Consolidated Statements of Operations.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Information presented in the tables below relates to Duke Energy and Duke Energy Ohio. Separate disclosure for Duke Energy Carolinas and Duke Energy Indiana is not presented as the balances are immaterial and regulatory Regulatory accounting treatment is applied to substantially all of theirthe derivative instruments.instruments at Duke Energy Carolinas and Duke Energy Indiana.

Commodity Price Risk

The Duke Energy Registrants are exposed to the impact of market changes in the future prices of electricity (energy, capacity and financial transmission rights), coal, natural gas and emission allowances (SO2, seasonal NOX and annual NOX) as a result of their energy operations such as electricity generation and the transportation and sale of natural gas. With respect to commodity price risks associated

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

with electricity generation, the Duke Energy Registrants are exposed to changes including, but not limited to, the cost of the coal and natural gas used to generate electricity, the prices of electricity in wholesale markets, the cost of capacity required to purchase and sell electricity in wholesale markets and the cost of emission allowances primarily at the Duke Energy Registrants’ coal fired power plants. Risks associated with commodity price changes on future operations are closely monitored and, where appropriate, various commodity contracts are used to mitigate the effect of such fluctuations on operations. Exposure to commodity price risk is influenced by a number of factors, including, but not limited to, the term of the contract, the liquidity of the market and delivery location.

Commodity Fair Value Hedges.At JuneSeptember 30, 2011, there were no open commodity derivative instruments that were designated as fair value hedges.

Commodity Cash Flow Hedges. At JuneSeptember 30, 2011, there were no open commodity derivative instruments that were designated as cash flow hedges.

Undesignated Contracts. The Duke Energy Registrants use derivative contracts as economic hedges to manage the market risk exposures that arise from providing electricity generation and capacity to large energy customers, energy aggregators, retail customers and other wholesale companies. Undesignated contracts may include contracts not designated as a hedge, contracts that do not qualify for hedge accounting, derivatives that do not or no longer qualify for the NPNS scope exception, and de-designated hedge contracts. Undesignated contracts also include contracts associated with operations that Duke Energy continues to wind down or has included as discontinued operations. As these undesignated contracts expire as late as 2021, Duke Energy has entered into economic hedges that leave it minimally exposed to changes in prices over the duration of these contracts.

Duke Energy Carolinas uses derivative contracts as economic hedges to manage the market risk exposures that arise from electricity generation. At JuneSeptember 30, 2011, Duke Energy Carolinas does not have any undesignated commodity contracts.

Duke Energy Ohio uses derivative contracts as economic hedges to manage the market risk exposures that arise from providing electricity generation and capacity to large energy customers, energy aggregators, retail customers and other wholesale companies. Undesignated contracts at JuneSeptember 30, 2011 are primarily associated with forward sales and purchases of power, coal and emission allowances, for the Commercial Power segment.

Duke Energy Indiana uses derivative contracts as economic hedges to manage the market risk exposures that arise from electricity generation. Undesignated contracts at JuneSeptember 30, 2011 are primarily associated with forward purchases and sales of power, financial transmission rights and emission allowances.

Interest Rate Risk

The Duke Energy Registrants are exposed to risk resulting from changes in interest rates as a result of their issuance or anticipated issuance of variable and fixed-rate debt and commercial paper. Interest rate exposure is managed by limiting variable-rate exposures to a percentage of total debt and by monitoring the effects of market changes in interest rates. To manage risk associated with changes in interest rates, the Duke Energy Registrants may enter into financial contracts; primarily interest rate swaps and U.S. Treasury lock agreements. Additionally, in anticipation of certain fixed-rate debt issuances, a series of forward starting interest rate swaps may be executed to lock in components of the market interest rates at the time and terminated prior to or upon the issuance of the corresponding debt. When these transactions occur within a business that meets the criteria for regulatory accounting treatment, these contracts may be treated as undesignated and any pre-tax gain or loss recognized from inception to termination of the hedges would be recorded as a regulatory liability or asset and amortized as a component of interest expense over the life of the debt. Alternatively, these derivatives may be designated as hedges whereby, any pre-tax gain or loss recognized from inception to termination of the hedges would be recorded in AOCI and amortized as a component of interest expense over the life of the debt.

At June 30, 2011, derivative instrumentsThe following table shows the notional amounts for derivatives related to interest rate risk are categorized as follows:

Duke Energy.$470 million notional amount of interest rate cash flow hedges related to non-recourse variable rate long-term debt of VIEsat September 30, 2011 and $23 million notional amount of undesignated interest rate contracts, both related to Commercial Power’s wind business, as well as the notional amounts related to Duke Energy Carolinas and Duke Energy Ohio below. See Note 11 for additional information on non-recourse long-term debt of VIEs.

Duke Energy Carolinas.$500 million notional amount of undesignated forward starting interest rate swaps related to hedging anticipated fixed rate debt issuances in 2012, and $25 million notional amount of interest rate fair value hedges.

Duke Energy Ohio. $250 million notional amount of interest rate fair value hedges and $27 million notional amount of undesignated interest rate contracts.

At December 31, 2010, derivative instruments related2010.

Notional Amounts of Derivative Instruments Related to interest rate risk are categorized as follows:Interest Rate Risk

   Duke Energy
Corporation
   Duke Energy
Carolinas
   Duke Energy
Ohio
   Duke Energy
Indiana
 
       (in millions)         

Cash Flow Hedges(a)

  $846    $—      $—      $—    

Undesignated Contracts

   748     500     27     200  

Fair Value Hedges

   275     25     250     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Notional Amount at September 30, 2011

  $1,869    $525    $277    $200  
  

 

 

   

 

 

   

 

 

   

 

 

 

   Duke Energy
Corporation
   Duke Energy
Carolinas
   Duke Energy
Ohio
 
       (in millions)     

Cash Flow Hedges(a)

  $492    $—      $—    

Undesignated Contracts

   561     500     27  

Fair Value Hedges

   275     25     250  
  

 

 

   

 

 

   

 

 

 

Total Notional Amount at December 31, 2010

  $1,328    $525    $277  
  

 

 

   

 

 

   

 

 

 

(a)Includes amounts related to non-recourse variable rate long-term debt of VIEs of $470 million at September 30, 2011 and $492 million at December 31, 2010.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Duke Energy.$492 million notional amount of interest rate cash flow hedges related to non-recourse variable rate long-term debt of VIEs and $34 million notional amount of undesignated interest rate contracts, both related to Commercial Power’s wind business, as well as the notional amounts related to Duke Energy Carolinas and Duke Energy Ohio below. See Note 11 for additional information on non-recourse long-term debt of VIEs.Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Duke Energy Carolinas.$500 million notional amount of undesignated forward starting interest rate swaps related to hedging anticipated fixed rate debt issuances in 2012, and $25 million notional amount of interest rate fair value hedges.

Duke Energy Ohio. $250 million notional amount of interest rate fair value hedges and $27 million notional amount of undesignated interest rate hedges.

Volumes

The following tables show information relating to the volume of Duke Energy and Duke Energy Ohio’s commodity derivative activity outstanding as of JuneSeptember 30, 2011 and December 31, 2010. Amounts disclosed represent the notional volumes of commodities contracts accounted for at fair value. For option contracts, notional amounts include only the delta-equivalent volumes which represent the notional volumes times the probability of exercising the option based on current price volatility. Volumes associated with contracts qualifying for the NPNS exception have been excluded from the table below. Amounts disclosed represent the absolute value of notional amounts. Duke

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Energy and Duke Energy Ohio have netted contractual amounts where offsetting purchase and sale contracts exist with identical delivery locations and times of delivery. Where all commodity positions are perfectly offset, no quantities are shown below. For additional information on notional dollar amounts of debt subject to derivative contracts accounted for at fair value, see “Interest Rate Risk” section above.

Underlying Notional Amounts for Derivative Instruments Accounted for At Fair Value

 

Duke Energy

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 

Commodity contracts

        

Electricity-energy (Gigawatt-hours)

   10,747     8,200     7,048     8,200  

Electricity-capacity (Gigawatt-months)

   —       58     —       58  

Emission allowances: SO2 (thousands of tons)

   8     8     8     8  

Natural gas (millions of decatherms)

   37     37     37     37  

Financial contracts

    

Interest rates (dollars in millions)

  $1,295    $1,328  

Duke Energy Ohio

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 

Commodity contracts

        

Electricity-energy (Gigawatt-hours)(a)

   13,658     13,183     11,947     13,183  

Electricity-capacity (Gigawatt-months)

   —       60     —       60  

Financial contracts

    

Interest rates (dollars in millions)

  $277    $277  

(a)Amounts include intercompany positions that are eliminated at Duke Energy.

The following table shows fair value amounts of derivative contracts as of JuneSeptember 30, 2011 and December 31, 2010, and the line item(s) in the Condensed Consolidated Balance Sheets in which such amounts are included. The fair values of derivative contracts are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements where Duke Energy nets the fair value of derivative contracts subject to master netting arrangements with the same counterparty on the Condensed Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative contracts have not been netted against the fair value amounts.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Location and Fair Value Amounts of Derivatives Reflected in the Condensed Consolidated Balance Sheets

Balance Sheet Location

 

Duke Energy

  June 30, 2011   December 31, 2010 
   Asset   Liability   Asset   Liability 
   (in millions) 

Derivatives Designated as Hedging Instruments

        

Interest rate contracts

        

Current Assets: Other

   3     —       5     —    

Investments and Other Assets: Other

   12     —       16     —    

Current Liabilities: Other

   —       13     —       13  
                    

Total Derivatives Designated as Hedging Instruments

  $15    $13    $21    $13  
                    

Derivatives Not Designated as Hedging Instruments

        

Commodity contracts

        

Current Assets: Other

  $107    $56    $108    $54  

Investments and Other Assets: Other

   44     4     55     4  

Current Liabilities: Other

   13     48     75     118  

Deferred Credits and Other Liabilities: Other

   7     82     3     72  

Interest rate contracts

        

Current Assets: Other(a)

   50     —       —       —    

Investments and Other Assets: Other(a)

   —       —       60     —    

Current Liabilities: Other

   —       2     —       2  

Deferred Credits and Other Liabilities: Other

   —       4     —       5  
                    

Total Derivatives Not Designated as Hedging Instruments

  $221    $196    $301    $255  
                    

Total Derivatives

  $236    $209    $322    $268  
                    

(a)Relates to interest rate swaps at Duke Energy Carolinas which receive regulatory accounting treatment.

Duke Energy Ohio

  June 30, 2011   December 31, 2010 

Duke Energy

  September 30, 2011   December 31, 2010 
  Asset   Liability   Asset   Liability   Asset   Liability   Asset   Liability 
  (in millions)   (in millions) 

Derivatives Designated as Hedging Instruments

                

Interest rate contracts

                

Current Assets: Other

   2     —       4     —       5     —       5     —    

Investments and Other Assets: Other

   5     —       2     —       4     —       16     —    

Current Liabilities: Other

   —       13     —       13  

Deferred Credits and Other Liabilities: Other

   —       71     —       —    
                  

 

   

 

   

 

   

 

 

Total Derivatives Designated as Hedging Instruments

  $7    $—      $6    $—      $9    $84    $21    $13  
                

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Derivatives Not Designated as Hedging Instruments

                

Commodity contracts

                

Current Assets: Other

  $89    $60    $106    $57    $73    $30    $108    $54  

Investments and Other Assets: Other

   4     2     6     2     43     6     55     4  

Current Liabilities: Other

   14     27     75     98     15     50     75     118  

Deferred Credits and Other Liabilities: Other

   7     13     3     7     9     77     3     72  

Interest rate contracts

                

Current Liabilities: Other

   —       1     —       1  

Deferred Credits and Other Liabilities: Other

   —       4     —       4  

Investments and Other Assets: Other(a)

   —       —       60     —    

Current Liabilities: Other(a)(b)

   —       94     —       2  

Deferred Credits and Other Liabilities: Other(c)

   —       68     —       5  
                  

 

   

 

   

 

   

 

 

Total Derivatives Not Designated as Hedging Instruments

  $114    $107    $190    $169    $140    $325    $301    $255  
                  

 

   

 

   

 

   

 

 

Total Derivatives

  $121    $107    $196    $169    $149    $409    $322    $268  
                  

 

   

 

   

 

   

 

 

(a)As of December 31, 2010, includes $60 million related to interest rate swaps at Duke Energy Carolinas which receive regulatory accounting treatment.
(b)As of September 30, 2011, includes $92 million related to interest rate swaps at Duke Energy Carolinas which receive regulatory accounting treatment.
(c)As of September 30, 2011, includes $60 million related to interest rate swaps at Duke Energy Indiana which receive regulatory accounting treatment.

Duke Energy Ohio

  September 30, 2011   December 31, 2010 
   Asset   Liability   Asset   Liability 
   (in millions) 

Derivatives Designated as Hedging Instruments

        

Interest rate contracts

        

Current Assets: Other

   4     —       4     —    

Investments and Other Assets: Other

   4     —       2     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives Designated as Hedging Instruments

  $8    $—      $6    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Derivatives Not Designated as Hedging Instruments

        

Commodity contracts

        

Current Assets: Other

  $55    $34    $106    $57  

Investments and Other Assets: Other

   7     2     6     2  

Current Liabilities: Other

   16     30     75     98  

Deferred Credits and Other Liabilities: Other

   12     17     3     7  

Interest rate contracts

        

Current Liabilities: Other

   —       1     —       1  

Deferred Credits and Other Liabilities: Other

   —       7     —       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives Not Designated as Hedging Instruments

  $90    $91    $190    $169  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives

  $98    $91    $196    $169  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the amount of the gains and losses recognized on derivative instruments designated and qualifying as cash flow hedges by type of derivative contract during the three and sixnine months ended JuneSeptember 30, 2011 and 2010, and the Condensed Consolidated Statements of Operations line items in which such gains and losses are included.

Cash Flow Hedges—Location and Amount of Pre-Tax LossesGains and (Losses) Recognized in Comprehensive Income

 

Duke Energy

  Three Months Ended
June  30,
 Six Months Ended
June  30,
   Three Months Ended
September 30,
 Nine months Ended
September 30,
 
  2011 2010 2011 2010   2011 2010 2011 2010 
  (in millions) (in millions)   (in millions) (in millions) 

Location of Pre-tax Losses Reclassified from AOCI into Earnings(a)

     

Location of Pre-tax Gains (Losses) Reclassified from AOCI into Earnings(a)

     

Commodity contracts

     

Fuel used in electric generation and purchased power—non-regulated

   —      1    —      1  

Interest rate contracts

          

Interest expense

   (2  (1  (3  (2   (1  (2  (4  (4
               

 

  

 

  

 

  

 

 

Total Pre-tax Losses Reclassified from AOCI into Earnings

  $(2 $(1 $(3 $(2  $(1 $(1 $(4 $(3
               

 

  

 

  

 

  

 

 

Duke Energy Ohio

  Three Months Ended
September 30,
   Nine months Ended
September 30,
 
   2011   2010   2011   2010 
   (in millions)   (in millions) 

Location of Pre-tax Gains Reclassified from AOCI into Earnings(a)

        

Commodity contracts

        

Fuel used in electric generation and purchased power—non-regulated

   —       1     —       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Pre-tax Gains Reclassified from AOCI into Earnings

  $—      $1    $—      $1  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)Represents the gains and losses on cash flow hedges previously recorded in AOCI during the term of the hedging relationship and reclassified into earnings during the current period.

Duke Energy’s effective portion of losses on cash flow hedges that were recognized in AOCI during the three and sixnine months ended JuneSeptember 30, 2011 were pre-tax losses of $10$73 million and $7$80 million, respectively, and pre-tax losses of $13$1 million and $14 million, respectively, during the three and sixnine months ended JuneSeptember 30, 2010. In addition, there was no hedge ineffectiveness during the three and sixnine months ended JuneSeptember 30, 2011 and 2010, and no gains or losses have been excluded from the assessment of hedge effectiveness during the same periods for all Duke Energy Registrants.

Duke Energy. At JuneSeptember 30, 2011, $36$108 million of pre-tax deferred net losses on derivative instruments related to interest rate cash flow hedges remains in AOCI, and a $13$7 million pre-tax lossgain is expected to be recognized in earnings during the next 12 months as the hedged transactions occur.

Duke Energy Ohio. At JuneSeptember 30, 2011, there were no pre-tax deferred net gains or losses on derivative instruments related to cash flow hedges remaining in AOCI.

The following table shows the amount of the pre-tax gains and losses recognized on undesignated contracts by type of derivative instrument during the three and sixnine months ended JuneSeptember 30, 2011 and 2010, and the line item(s) in the Condensed Consolidated Statements of Operations in which such gains and losses are included or deferred on the Condensed Consolidated Balance Sheets as regulatory assets or liabilities.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Undesignated Contracts—Location and Amount of Pre-Tax Gains and (Losses) Recognized in

Income or as Regulatory Assets or Liabilities

 

Duke Energy

  Three Months Ended
June  30,
 Six Months Ended
June  30,
   Three Months Ended
September 30,
 Nine months Ended
September 30,
 
  2011 2010 2011 2010   2011 2010 2011 2010 
  (in millions) (in millions)   (in millions) (in millions) 

Location of Pre-Tax Gains and (Losses) Recognized in Earnings

     

Location of Pre-Tax Gains (Losses) Recognized in Earnings

     

Commodity contracts

          

Revenue, regulated electric

  $—     $—     $—     $1    $—     $—     $—     $1  

Revenue, non-regulated electric, natural gas and other

   (12  (47  (25  (34   —      3    (25  (31

Fuel used in electric generation and purchased power-non-regulated

   —      6   (1)  6    —      —      (1  6  

Interest rate contracts

     

Interest expense

   —      —      —      —    
               

 

  

 

  

 

  

 

 

Total Pre-tax Losses Recognized in Earnings

  $(12 $(41 $(26 $(27

Total Pre-tax Gains (Losses) Recognized in Earnings

  $—     $3   $(26 $(24
               

 

  

 

  

 

  

 

 

Location of Pre-Tax Gains and (Losses) Recognized as Regulatory Assets or Liabilities

     

Location of Pre-Tax Gains (Losses) Recognized as Regulatory Assets or Liabilities

     

Commodity contracts

          

Regulatory Asset

  $(1 $4   $(1 $2    $2   $—     $1   $2  

Regulatory Liability

   11    8    10    12     2    (2  12    10  

Interest rate contracts

          

Regulatory Asset

   (21  (2  (9  (2

Regulatory Asset(a)

   (146  (6  (155  (8

Regulatory Liability(b)

   (60  —      (60  —    
               

 

  

 

  

 

  

 

 

Total Pre-tax Gains and (Losses) Recognized as Regulatory Assets or Liabilities

  $(11 $10   $—     $12  

Total Pre-tax Gains (Losses) Recognized as Regulatory Assets or Liabilities

  $(202 $(8 $(202 $4  
               

 

  

 

  

 

  

 

 

Duke Energy Ohio

  Three Months Ended
June  30,
 Six Months Ended
June  30,
 
  2011 2010 2011 2010 
  (in millions) (in millions) 

Location of Pre-Tax Gains and (Losses) Recognized in Earnings

     

Commodity contracts

     

Revenue, non-regulated electric and other

  $(16 $(79 $(22 $(18

Fuel used in electric generation and purchased power-non-regulated

   —      6   (1)  6 

Interest rate contracts

     

Interest expense

   (1  —      (1  —    
             

Total Pre-tax Losses Recognized in Earnings(a)

  $(17 $(73 $(24 $(12
             

Location of Pre-Tax Gains and (Losses) Recognized as Regulatory Assets

     

Commodity contracts

     

Regulatory Asset

  $(1 $4   $(1 $2  

Interest rate contracts

     

Regulatory Asset

   —      (2  —      (2)
             

Total Pre-tax Gains and (Losses) Recognized as Regulatory Assets

  $(1 $2   $(1 $—    
             

(a)Includes amounts related to interest rate swaps at Duke Energy Carolinas during the three and nine months ended September 30, 2011 of $82 million and $91 million, respectively, and includes $60 million related to interest rate swaps at Duke Energy Indiana for both the three and nine months ended September 30, 2011.
(b)Amounts relate to interest rate swaps at Duke Energy Carolinas.

Duke Energy Ohio

  Three Months Ended
September 30,
  Nine months Ended
September 30,
 
   2011  2010  2011  2010 
   (in millions)  (in millions) 

Location of Pre-Tax Gains (Losses) Recognized in Earnings

     

Commodity contracts

     

Revenue, non-regulated electric and other

  $(6 $46   $(28 $28  

Fuel used in electric generation and purchased power-non-regulated

   —      —      (1  6  

Interest rate contracts

     

Interest expense

   —      (1  (1  (1
  

 

 

  

 

 

  

 

 

  

 

 

 

Total Pre-tax Gains (Losses) Recognized in Earnings(a)

  $(6 $45   $(30 $33  
  

 

 

  

 

 

  

 

 

  

 

 

 

Location of Pre-Tax Gains (Losses) Recognized as Regulatory Assets

     

Commodity contracts

     

Regulatory Asset

  $2   $—     $1   $2  

Interest rate contracts

     

Regulatory Asset

   (4  (2  (4  (4
  

 

 

  

 

 

  

 

 

  

 

 

 

Total Pre-tax Losses Recognized as Regulatory Assets

  $(2 $(2 $(3 $(2
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)Amounts include intercompany positions that are eliminated at Duke Energy.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Credit Risk

Certain of Duke Energy and Duke Energy Ohio’s derivative contracts contain contingent credit features, such as material adverse change clauses or payment acceleration clauses that could result in immediate payments, the posting of letters of credit or the termination of the derivative contract before maturity if specific events occur, such as a downgrade of Duke Energy or Duke Energy Ohio’s credit rating below investment grade.

The following table shows information with respect to derivative contracts that are in a net liability position and contain objective credit-risk related payment provisions. The amounts disclosed in the table below represent the aggregate fair value amounts of such derivative instruments at the end of the reporting period, the aggregate fair value of assets that are already posted as collateral under such derivative instruments at the end of the reporting period, and the aggregate fair value of additional assets that would be required to be transferred in the event that credit-risk-related contingent features were triggered at JuneSeptember 30, 2011 and December 31, 2010.

Information Regarding Derivative Instruments that Contain Credit-risk Related Contingent Features

 

Duke Energy

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Aggregate Fair Value Amounts of Derivative Instruments in a Net Liability Position

  $84    $148    $66    $148  

Collateral Already Posted

  $16    $2    $25    $2  

Additional Cash Collateral or Letters of Credit in the Event Credit-risk-related Contingent Features were Triggered at the End of the Reporting Period

  $6    $14    $4    $14  

Duke Energy Ohio

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Aggregate Fair Value Amounts of Derivative Instruments in a Net Liability Position

  $84    $147    $65    $147  

Collateral Already Posted

  $16    $2    $25    $2  

Additional Cash Collateral or Letters of Credit in the Event Credit-risk-related Contingent Features were Triggered at the End of the Reporting Period

  $6    $14    $4    $14  

Netting of Cash Collateral and Derivative Assets and Liabilities Under Master Netting Arrangements.In accordance with applicable accounting rules, Duke Energy and Duke Energy Ohio have elected to offset fair value amounts (or amounts that approximate fair value) recognized on their Condensed Consolidated Balance Sheets related to cash collateral amounts receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting agreement. The amounts disclosed in the table below represent the receivables related to the right to reclaim cash collateral and payables related to the obligation to return cash collateral under master netting arrangements as of JuneSeptember 30, 2011 and December 31, 2010. See Note 9 for additional information on fair value disclosures related to derivatives.

Information Regarding Cash Collateral under Master Netting Arrangements

 

  June 30, 2011   December 31, 2010   September 30, 2011   December 31, 2010 
  (in millions)   (in millions)   (in millions)   (in millions) 

Duke Energy

  Receivables   Payables   Receivables   Payables   Receivables   Payables   Receivables   Payables 

Amounts offset against net derivative positions on the Condensed Consolidated Balance Sheets

  $3     —      $2     —      $7     —      $2     —    

Amounts not offset against net derivative positions on the Condensed Consolidated Balance Sheets(a)

  $23     —      $2    $3    $28     —      $2    $3  
  June 30, 2011   December 31, 2010   September 30, 2011   December 31, 2010 
  (in millions)   (in millions)   (in millions)   (in millions) 

Duke Energy Ohio

  Receivables   Payables   Receivables   Payables   Receivables   Payables   Receivables   Payables 

Amounts offset against net derivative positions on the Condensed Consolidated Balance Sheets

  $3     —      $2     —      $7     —      $2     —    

Amounts not offset against net derivative positions on the Condensed Consolidated Balance Sheets (a)

   —      $14     —      $3    $16   $—       —      $3  

 

(a)Amounts for payables primarily represents initialrepresent margin deposits related to futures contracts.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

9. Fair Value of Financial Assets and Liabilities

Under existing accounting guidance, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The fair value definition focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability versus an entry price, which would be the price paid to acquire an asset or received to assume a liability.

The Duke Energy Registrants classify recurring and non-recurring fair value measurements based on the following fair value hierarchy, as prescribed by the accounting guidance for fair value, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1—unadjusted quoted prices in active markets for identical assets or liabilities that Duke Energy has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information. Duke Energy does not adjust quoted market prices on Level 1 for any blockage factor.

Level 2—a fair value measurement utilizing inputs other than a quoted market price that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates. A Level 2 measurement cannot have more than an insignificant portion of the valuation based on unobservable inputs.

Level 3—any fair value measurements which include unobservable inputs for the asset or liability for more than an insignificant portion of the valuation. A Level 3 measurement may be based primarily on level 2 inputs.

The fair value accounting guidance for financial instruments permits entities to elect to measure many financial instruments and certain other items at fair value that are not required to be accounted for at fair value under other GAAP. There are no financial assets or financial liabilities that are not required to be accounted for at fair value under GAAP for which the option to record at fair value has been elected by the Duke Energy Registrants. However, in the future, the Duke Energy Registrants may elect to measure certain financial instruments at fair value in accordance with this accounting guidance.

The Duke Energy Registrant’s Policy for the recognition of transfers between levels of the fair value hierarchy is to recognize the transfer at the end of the period.

Valuation methods of the primary fair value measurements disclosed below are as follows:

Investments in equity securities.Investments in equity securities are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as NASDAQ and NYSE. Foreign equity prices are translated from their trading currency using the currency exchange rate in effect at the close of the principal active market. Prices have not been adjusted to reflect for after-hours market activity. The majority of investments in equity securities are valued using Level 1 measurements.

Investments in available-for-sale auction rate securities. Duke Energy held $125$115 million par value ($9997 million carrying value) and $149 million par value ($118 million carrying value) as of JuneSeptember 30, 2011, and December 31, 2010, respectively of auction rate securities for which an active market does not currently exist. During the threenine months ended JuneSeptember 30, 2011, $22$34 million of these investments in auction rate securities were redeemed by the issuer at full par value plus accrued interest. Duke Energy Carolinas held $16 million par value ($12 million carrying value) of these auction rate securities at both JuneSeptember 30, 2011, and December 31, 2010. The vast majority of these auction rate securities are AAA rated student loan securities for which substantially all the values are ultimately backed by the U.S. government. Those auction rate securities which are classified as long-term investments are valued using Level 3 measurements. The methods and significant assumptions used to determine the fair values of the investment in auction rate debt securities represent estimations of fair value using internal discounted cash flow models which incorporate primarily management’s own assumptions as to the term over which such investments will be recovered at par, the current level of interest rates, and the appropriate risk-adjusted discount rates when relevant observable inputs are not available to determine the present value of such cash flows. In preparing the valuations, all significant value drivers were considered, including the underlying collateral. Those auction rate securities which are classified as Short-term investments are valued using Level 2 measurements, as they are valued at par based on a commitment by the issuer to redeem at par value. As of JuneSeptember 30, 2011, Duke Energy held $9$25 million of auction rate securities classified as short-term investments. In JulyOctober 2011, Duke Energy received $9$25 million from the issuer who redeemed the securities at par value. As a result, at JuneSeptember 30, 2011, Duke Energy recorded the fair value equal to the par value and transferred these securities from Level 3 to Level 2.

There were no other-than-temporary impairments associated with investments in auction rate debt securities during the sixnine months ended JuneSeptember 30, 2011 or 2010.

Investments in debt securities. Most debt investments (including those held in the Nuclear Decomissioning Trust Funds (NDTF) are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate) and consider the counterparty credit rating. Most debt valuations are Level 2 measurements. If the market for a particular fixed income security is relatively inactive or illiquid, the measurement is a Level 3 measurement. U.S. Treasury debt is typically a Level 1 measurement.

Commodity derivatives. The pricing for commodity derivatives is primarily a calculated value which incorporates the forward price and is adjusted for liquidity (bid-ask spread), credit or non-performance risk (after reflecting credit enhancements such as collateral) and discounted to present value. The primary difference between a Level 2 and a Level 3 measurement has to do with the level of activity in forward markets for the commodity. If the market is relatively inactive, the measurement is deemed to be a Level 3 measurement. Some commodity derivatives are exchange traded contracts, which are classified as Level 1 measurements.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Duke Energy

The following tables provide the fair value measurement amounts for assets and liabilities recorded on Duke Energy’s Condensed Consolidated Balance Sheets at fair value at JuneSeptember 30, 2011 and December 31, 2010. Derivative amounts in the table below exclude cash collateral amounts which are disclosed in Note 8. See Note 10 for additional information related to investments by major security type.

 

  Total Fair
Value
Amounts at
June 30,
2011
 Level 1 Level 2 Level 3   Total Fair
Value
Amounts at
September 30,
2011
 Level 1 Level 2 Level 3 
  (in millions)   (in millions) 

Description

          

Investments in available-for-sale auction rate securities(a)

  $99   $—     $9  $90    $97   $—     $25   $72  

Nuclear decommissioning trust fund equity securities

   1,452    1,400    47    5     1,206    1,154    46    6  

Nuclear decommissioning trust fund debt securities

   685    86    551    48     718    151    519    48  

Other long-term trading and available-for-sale equity securities(b)

   73    65    8    —       62    55    7    —    

Other long-term trading and available-for-sale debt securities(b)

   220    27    193    —    

Derivative assets(c)

   156    15    65    76  

Other trading and available-for-sale debt securities(c)

   330    27    303    —    

Derivative assets(d)

   89    15    9    65  
               

 

  

 

  

 

  

 

 

Total Assets

  $2,685   $1,593   $873   $219    $2,502   $1,402   $909   $191  

Derivative liabilities(d)

   (129  (11  (20  (98

Derivative liabilities(e)

   (349  (57  (203  (89
               

 

  

 

  

 

  

 

 

Net Assets

  $2,556   $1,582   $853   $121    $2,153   $1,345   $706   $102  
               

 

  

 

  

 

  

 

 

 

(a)$9072 million of these securities are included in Other within Investments and Other Assets and $9$25 million are classified as Short-Term Investments on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(c)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(c)$209 million of these securities are included in Other within Investments and Other Assets and $121 million are classified as Short-Term Investments on the Condensed Consolidated Balance Sheets.
(d)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(e)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

 

   Total Fair
Value
Amounts at
December 31,
2010
  Level 1  Level 2  Level 3 
   (in millions) 

Description

     

Investments in available-for-sale auction rate securities(a)

  $118   $—     $—     $118  

Nuclear decommissioning trust fund equity securities

   1,365    1,313    46    6  

Nuclear decommissioning trust fund debt securities

   649    35    573    41  

Other long-term trading and available-for-sale equity securities(a)

   164    157    7    —    

Other long-term trading and available-for-sale debt securities(a)

   221    10    211    —    

Derivative assets(b)

   186    21    81    84  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total Assets

  $2,703   $1,536   $918   $249  

Derivative liabilities(c)

   (132  (8  (21  (103
  

 

 

  

 

 

  

 

 

  

 

 

 

Net Assets

  $2,571   $1,528   $897   $146  
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Rollforward of Level 3 Measurements

 

   Available-for-
Sale
Auction Rate
Securities
  Available-for-
Sale
NDTF
Investments
  Derivatives
(net)
  Total 

Three Months Ended June 30, 2011

     

Balance at April 1, 2011

  $122   $48  $(24 $146  

Total pre-tax realized or unrealized losses included in earnings:

     

Revenue, non-regulated electric, natural gas, and other

   —      —      (11  (11

Total pre-tax losses included in other comprehensive income:

     

Losses on available for sale securities and other

   (1  —      —      (1

Purchases, sales, issuances and settlements:

     

Purchases

   —      6   —      6  

Sales

   —      (1  —      (1

Settlements

   (22  —      (6  (28

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —      —      19   19  

Transfers out of Level 3

   (9    (9
                 

Balance at June 30, 2011

  $90   $53   $(22 $121  
                 

Three Months Ended June 30, 2010

     

Balance at April 1, 2010

  $202   $25  $21   $248  

Total pre-tax realized or unrealized losses included in earnings:

     

Revenue, non-regulated electric, natural gas, and other

   —      —      (73  (73

Fuel used in electric generation and purchased power - non-regulated

   —      —      (8  (8

Total pre-tax gains(losses) included in other comprehensive income:

     

Gains on available for sale securities and other

   5      5  

Losses on commodity cash flow hedges

     (1  (1

Net purchases, sales, issuances and settlements

   (29  23    41    35  

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —      —      13    13  
                 

Balance at June 30, 2010

  $178   $48   $(7 $219  
                 
   Available-for-
Sale
Auction Rate
Securities
  Available-for-
Sale
NDTF
Investments
  Derivatives
(net)
  Total 

Six Months Ended June 30, 2011

     

Balance at January 1, 2011

  $118   $47  $(19 $146  

Transfers in to Level 3

   —      —      —      —    

Total pre-tax realized or unrealized losses included in earnings:

     

Revenue, non-regulated electric, natural gas, and other

   —      —      (19  (19

Fuel used in electric generation and purchased power-non-regulated

   —      —      —      —    

Total pre-tax gains included in other comprehensive income:

     

Gains on available for sale securities and other

   5    —      —      5  

Net purchases, sales, issuances and settlements:

     

Purchases

   —      7   —      7  

Sales

   —      (3)  —      (3)

Settlements

   (24  —      (3  (27

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability or as non-current liability

   —      2   19    21  

Transfers out of Level 3

   (9    (9
                 

Balance at June 30, 2011

  $90   $53   $(22 $121  
                 
   Available-for-
Sale
Auction Rate
Securities
  Available-for-
Sale
NDTF
Investments
   Derivatives
(net)
  Total 

Three Months Ended September 30, 2011

      

Balance at July 1, 2011

  $90   $53    $(22 $121  

Total pre-tax realized or unrealized gains included in earnings:

      

Revenue, regulated electric(a)

   —      —       8    8  

Total pre-tax gains included in other comprehensive income:

      

Gains on available for sale securities and other

   8    —       —      8  

Purchases, sales, issuances and settlements:

      

Purchases(a)

   —      —       8   8  

Settlements

   (1  —       (2  (3

Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —      1    (16  (15

Transfers out of Level 3

   (25     (25
  

 

 

  

 

 

   

 

 

  

 

 

 

Balance at September 30, 2011

  $72   $54    $(24 $102  
  

 

 

  

 

 

   

 

 

  

 

 

 

(a)    Derivative amounts relate to financial transmission rights.

      

Three Months Ended September 30, 2010

      

Balance at July 1, 2010

  $178   $48    $(7 $219  

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Total pre-tax realized or unrealized losses included in earnings:

     

Revenue, non-regulated electric, natural gas, and other

   —      —      (15  (15

Fuel used in electric generation and purchased power—non-regulated

   —      —      (3  (3

Total pre-tax gains included in other comprehensive income:

     

Gains on available for sale securities and other

   2    —      —      2  

Net purchases, sales, issuances and settlements

   (3  (4  2    (5

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —      2   1    3  
  

 

  

 

  

 

  

 

 

Balance at September 30, 2010

  $177   $46   $(22 $201  
  

 

  

 

  

 

  

 

 
  Available-for-
Sale
Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
   Derivatives
(net)
 Total 

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at June 30, 2011:

      
  Available-for-
Sale

Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
 Derivatives
(net)
 Total 

Nine months Ended September 30, 2011

     

Balance at January 1, 2011

  $118   $47   $(19 $146  

Total pre-tax realized or unrealized gains (losses) included in earnings:

     

Revenue, regulated electric(a)

   —      —      8    8  

Revenue, non-regulated electric, natural gas, and other

   —      —      (19  (19

Total pre-tax gains included in other comprehensive income:

     

Gains on available for sale securities and other

   13    —      —      13  

Net purchases, sales, issuances and settlements:

     

Purchases(a)

   —      7   8   15  

Sales

   —      (3  —      (3

Settlements

   (25  —      (5  (30

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability or as non-current liability

   —      3    3    6  

Transfers out of Level 3

   (34    (34
  

 

  

 

  

 

  

 

 

Balance at September 30, 2011

  $72   $54   $(24 $ 102  
  

 

  

 

  

 

  

 

 

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at September 30, 2011:

     

Revenue, non-regulated electric, natural gas, and other

  $—     $—      $(10 $(10  $—     $—     $(12 $(12
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Total

  $—     $—      $(10 $(10  $—     $—     $(12 $(12
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Six Months Ended June 30, 2010

      

(a) Derivative amounts relate to financial transmission rights

     

Nine months Ended September 30, 2010

     

Balance at January 1, 2010

  $198   $—      $25   $223    $198   $—     $25   $223  

Transfers in to Level 3

   —      —       —      —    

Total pre-tax realized or unrealized losses included in earnings:

           

Revenue, non-regulated electric, natural gas, and other

   —      —       (29  (29   —      —      (44  (44

Fuel used in electric generation and purchased power-non-regulated

   —      —       (11  (11   —      —     (14  (14

Total pre-tax gains included in other comprehensive income:

    —       —          

Gains on available for sale securities and other

   10       10     12    —      —      12  

Net purchases, sales, issuances and settlement

   (30  48     (7  11     (33  44    (5  6  

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability or as non-current liability

   —      —       15    15     —      2   16    18  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Balance at June 30, 2010

  $178   $48    $(7 $219  

Balance at September 30, 2010

  $177   $46   $(22 $201  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at June 30, 2011:

      

Revenue, non-regulated electric, natural gas, and other

  $—     $—      $16   $16  

Fuel used in electric generation and purchased power-non-regulated

   —      —       (1  (1
  

 

  

 

   

 

  

 

 

Total

  $—     $—      $15   $15  
  

 

  

 

   

 

  

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at September 30, 2010:

       

Revenue, non-regulated electric, natural gas, and other

  $—      $—      $15   $15  

Fuel used in electric generation and purchased power-non-regulated

   —       —       (1  (1
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  $—      $—      $14   $14  
  

 

 

   

 

 

   

 

 

  

 

 

 

Duke Energy Carolinas

The following tables provide the fair value measurement amounts for assets and liabilities recorded on Duke Energy Carolinas’ Condensed Consolidated Balance Sheets at fair value at JuneSeptember 30, 2011 and December 31, 2010. Amounts presented in the tables below exclude cash collateral amounts. See Note 10 for additional information related to investments by major security type.

 

  Total Fair
Value
Amounts at
June 30,
2011
   Level 1   Level 2   Level 3   Total Fair
Value
Amounts at
September 30,
2011
 Level 1   Level 2 Level 3 
  (in millions)   (in millions) 

Description

              

Investments in available-for-sale auction rate securities(a)

  $12    $—      $—      $12    $12   $—      $—     $12  

Nuclear decommissioning trust fund equity securities

   1,452     1,400     47     5     1,206    1,154     46    6  

Nuclear decommissioning trust fund debt securities

   685     86     551     48     718    151     519    48  

Derivative assets(b)

   51     —       51     —       1    —       1    —    
  

 

   

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Total assets

  $2,200    $1,486    $649    $65     1,937    1,305     566    66  

Derivative liabilities(c)

   (92  —       (92  —    
  

 

   

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Net Assets

  $1,845   $1,305    $474   $66  
  

 

  

 

   

 

  

 

 

 

(a)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

 

   Total Fair
Value
Amounts at
December 31,
2010
  Level 1  Level 2   Level 3 
   (in millions) 

Description

      

Investments in available-for-sale auction rate securities(a)

  $12   $—     $—      $12  

Nuclear decommissioning trust fund equity securities

   1,365    1,313    46     6  

Nuclear decommissioning trust fund debt securities

   649    35    573     41  

Derivative assets(b)

   62    1    61     —    
  

 

 

  

 

 

  

 

 

   

 

 

 

Total assets

   2,088    1,349    680     59  

Derivative liabilities(c)

   (1  (1  —       —    
  

 

 

  

 

 

  

 

 

   

 

 

 

Net Assets

  $2,087   $1,348   $680    $59  
  

 

 

  

 

 

  

 

 

   

 

 

 

 

(a)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

The following table provides a reconciliation of beginning and ending balances of assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):

Rollforward of Level 3 Measurements

 

   Available-for-
Sale
Auction Rate
Securities
  Available-for-
Sale
NDTF
Investments
  Total 
   (in millions) 

Three Months Ended June 30, 2011

    

Balance at April 1, 2011

  $12   $48  $60  

Purchases, sales, issuances and settlements:

    

Purchases

   —      6    6  

Sales

   —      (1  (1
             

Balance at June 30, 2011

  $12   $53   $65  
             
   Available-for-
Sale
Auction Rate
Securities
  Available-for-
Sale
NDTF
Investments
  Total 
   (in millions) 

Three Months Ended June 30, 2010

    

Balance at April 1, 2010

  $66   $25  $91  

Total pre-tax gains included in other comprehensive income:

    

Gains on available for sale securities and other

   2   —      2 

Net purchases, sales, issuances and settlements

   (8)  23    15  
             

Balance at June 30, 2010

  $60   $48   $108  
             
   Available-for-
Sale
Auction Rate
Securities
   Available-for-
Sale
NDTF
Investments
  Total 
   (in millions) 

Three Months Ended September 30, 2011

     

Balance at July 1, 2011

  $12    $53   $65  

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —       1    1  
  

 

 

   

 

 

  

 

 

 

Balance at September 30, 2011

  $12    $54   $66  
  

 

 

   

 

 

  

 

 

 
   Available-for-
Sale
Auction Rate
Securities
   Available-for-
Sale
NDTF
Investments
  Total 
   (in millions) 

Three Months Ended September 30, 2010

     

Balance at July 1, 2010

  $60    $48   $108  

Total pre-tax gains included in other comprehensive income:

     

Gains on available for sale securities and other

   1     —      1  

Net purchases, sales, issuances and settlements

   —       (4  (4

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —       2    2  
  

 

 

   

 

 

  

 

 

 

Balance at September 30, 2010

  $61    $46   $107  
  

 

 

   

 

 

  

 

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

  Available-for-
Sale
Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
 Total   Available-for-
Sale
Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
 Total 
  (in millions)   (in millions) 

Six Months Ended June 30, 2011

    

Nine months Ended September 30, 2011

    

Balance at January 1, 2011

  $12   $47  $59    $12   $47   $59  

Purchases, sales, issuances and settlements:

        

Purchases

   —      7    7     —      7    7  

Sales

   —      (3  (3   —      (3  (3

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   —      2    2     —      3    3  
            

 

  

 

  

 

 

Balance at June 30, 2011

  $12   $53   $65  

Balance at September 30, 2011

  $12   $54   $66  
            

 

  

 

  

 

 
  Available-for-
Sale
Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
 Total   Available-for-
Sale
Auction Rate
Securities
 Available-for-
Sale
NDTF
Investments
 Total 
  (in millions)   (in millions) 

Six Months Ended June 30, 2010

    

Nine months Ended September 30, 2010

    

Balance at January 1, 2010

  $66   $—     $66    $66   $—     $66  

Total pre-tax gains included in other comprehensive income:

        

Gains on available for sale securities and other

   2    —      2     3    —      3  

Net purchases, sales, issuances and settlements

   (8  48    40     —      44    44  

Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   (8  2    (6
            

 

  

 

  

 

 

Balance at June 30, 2010

  $60   $48   $108  

Balance at September 30, 2010

  $61   $46   $107  
            

 

  

 

  

 

 

Duke Energy Ohio

The following tables provide the fair value measurement amounts for assets and liabilities recorded on Duke Energy Ohio’s Condensed Consolidated Balance Sheets at fair value at JuneSeptember 30, 2011 and December 31, 2010. Amounts presented in the tables below exclude cash collateral amounts which are disclosed separately in Note 8.

 

  Total Fair
Value
Amounts at
June 30,
2011
 Level 1 Level 2 Level 3   Total Fair
Value
Amounts at
September 30,
2011
 Level 1 Level 2 Level 3 
  (in millions)   (in millions) 

Description

          

Derivative assets(a)

  $38   $14   $7   $17    $34   $11   $8   $15  

Derivative liabilities(b)

   (24  (9  (5  (10   (27  (11  (8  (8
               

 

  

 

  

 

  

 

 

Net Assets

  $14   $5   $2   $7    $7   $—     $—     $7  
               

 

  

 

  

 

  

 

 

 

(a)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

   Total Fair
Value
Amounts at
December 31,
2010
  Level 1  Level 2  Level 3 
   (in millions) 

Description

     

Derivative assets(a)

  $59   $20   $6   $33  

Derivative liabilities(b)

   (32  (7  (5  (20
  

 

 

  

 

 

  

 

 

  

 

 

 

Net Assets

  $27   $13   $1   $13  
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)Included in Other within Current Assets and Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of beginning and ending balances of assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):

Rollforward of Level 3 Measurements

 

  Derivatives
(net)
   Derivatives
(net)
 

Three Months Ended June 30, 2011

  

Balance at April 1, 2011

  $17  

Three Months Ended September 30, 2011

  

Balance at July 1, 2011

  $7  

Total pre-tax realized or unrealized losses included in earnings:

    

Revenue, non-regulated electric and other

   (10   (1
    

Balance at June 30, 2011

  $7  
    

Three Ended June 30, 2010

  

Balance at April 1, 2010

  $56  

Total pre-tax realized or unrealized losses included in earnings:

  

Revenue, non-regulated electric and other

   (50

Fuel used in electric generation and purchased power - non-regulated

   (8

Total pre-tax losses included in other comprehensive income:

  

Losses on commodity cash flow hedges

   (1

Net purchases, sales, issuances and settlements

   (4

Purchases, sales, issuances and settlements:

  

Settlements

   (1

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   3     2  
      

 

 

Balance at June 30, 2010

  $(4

Balance at September 30, 2011

  $7  
  

 

 

Three Ended September 30, 2010

  

Balance at July 1, 2010

  $(4

Total pre-tax realized or unrealized gains (losses) included in earnings:

  

Revenue, non-regulated electric and other

   29  

Fuel used in electric generation and purchased power—non-regulated

   (2

Net purchases, sales, issuances and settlements

   9  
  

 

 

Balance at September 30, 2010

  $32  
  

 

 
  Derivatives
(net)
 

Six Months Ended June 30, 2011

  
  Derivatives
(net)
 

Nine months Ended September 30, 2011

  

Balance at January 1, 2011

  $13    $13  

Total pre-tax realized or unrealized losses included in earnings:

    

Revenue, non-regulated electric and other

   (6   (7

Purchases, sales, issuances and settlements:

    

Settlements

   (1   (2

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   1     3  
      

 

 

Balance at June 30, 2011

  $7  

Balance at September 30, 2011

  $7  
      

 

 

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at June 30, 2011:

  

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at September 30, 2011:

  

Revenue, non-regulated electric and other

  $1    $1  
      

 

 

Total

  $1    $1  
      

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

  Derivatives
(net)
   Derivatives
(net)
 

Six Months Ended June 30, 2010

  

Nine months Ended September 30, 2010

  

Balance at January 1, 2010

  $7    $7  

Total pre-tax realized or unrealized losses included in earnings:

  

Total pre-tax realized or unrealized gains (losses) included in earnings:

  

Revenue, non-regulated electric and other

   (2   27  

Fuel used in electric generation and purchased power - non-regulated

   (11

Fuel used in electric generation and purchased power—non-regulated

   (13

Net purchases, sales, issuances and settlements

   (1   8  

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   3     3  
      

 

 

Balance at June 30, 2010

  $(4

Balance at September 30, 2010

  $32  
      

 

 

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at June 30, 2010:

  

Pre-tax amounts included in the Condensed Consolidated Statements of Operations related to Level 3 measurements outstanding at September 30, 2010:

  

Revenue, non-regulated electric and other

  $16    $31  

Fuel used in electric generation and purchased power - non-regulated

   (1

Fuel used in electric generation and purchased power—non-regulated

   (1
      

 

 

Total

  $15    $30  
      

 

 

Duke Energy Indiana

The following tables provide the fair value measurement amounts for assets and liabilities recorded on Duke Energy Indiana’s Condensed Consolidated Balance Sheets at fair value at JuneSeptember 30, 2011 and December 31, 2010. Amounts presented in the tables below exclude cash collateral amounts. See Note 10 for additional information related to investments by major security type.

 

  Total Fair
Value
Amounts at
June 30,
2011
 Level 1   Level 2 Level 3   Total Fair
Value
Amounts at
September 30,
2011
 Level 1   Level 2 Level 3 
  (in millions)   (in millions) 

Description

            

Available-for-sale equity securities(a)

  $49   $49    $—     $—      $42   $42    $—     $—    

Available-for-sale debt securities(a)

   27    —       27    —       28    —       28    —    

Derivative assets(b)

   10    —       —      10     6    —       —      6  
                

 

  

 

   

 

  

 

 

Total Assets

   86    49     27    10     76    42     28    6  

Derivative liabilities(c)

   (2  —       (2  —       (62  —       (62  —    
                

 

  

 

   

 

  

 

 

Net Assets

  $84   $49    $25   $10    $14   $42    $(34 $6  
                

 

  

 

   

 

  

 

 

 

(a)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Assets on the Condensed Consolidated Balance Sheets.
(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

 

   Total Fair
Value
Amounts at
December 31,
2010
  Level 1   Level 2  Level 3 
   (in millions) 

Description

      

Available-for-sale equity securities(a)

  $47   $47    $—     $—    

Available-for-sale debt securities(a)

   26    —       26    —    

Derivative assets(b)

   4    —       —      4  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total Assets

   77    47     26    4  

Derivative liabilities(c)

   (2  —       (2  —    
  

 

 

  

 

 

   

 

 

  

 

 

 

Net Assets

  $75   $47    $24   $4  
  

 

 

  

 

 

   

 

 

  

 

 

 

 

(a)Included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(b)Included in Other within Current Assets on the Condensed Consolidated Balance Sheets.
(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

(c)Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of beginning and ending balances of assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):

Rollforward of Level 3 measurements

 

   Derivatives
(net)
 
   (in millions) 

Three Months Ended June 30, 2011

  

Balance at April 1, 2011

  $1  

Net purchases, sales, issuances and settlements:

  

Settlements

   (10

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   19  
  

 

 

 

Balance at June 30, 2011

  $10  
  

 

 

 

Three Months Ended June 30, 2010

  

Balance at April 1, 2010

  $3  

Net purchases, sales, issuances and settlements

   (6

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   10  
  

 

 

 

Balance at June 30, 2010

  $7  
  

 

 

 
   Derivatives
(net)
 
   (in millions) 

Three Months Ended September 30, 2011

  

Balance at July 1, 2011

  $10  

Total pre-tax realized or unrealized gains included in earnings:

  

Revenue, regulated electric(a)

   8  

Net purchases, sales, issuances and settlements:

  

Purchases(a)

   8  

Settlements

   (2

Total losses included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   (18
  

 

 

 

Balance at September 30, 2011

  $6  
  

 

 

 

Three Months Ended September 30, 2010

  

Balance at July 1, 2010

  $7  

Net purchases, sales, issuances and settlements

   (3
  

 

 

 

Balance at September 30, 2010

  $4  
  

 

 

 

 

   Derivatives
(net)
 
   (in millions) 

Six Months Ended June 30, 2011

  

Balance at January 1, 2011

  $4  

Net purchases, sales, issuances and settlements:

  

Settlements

   (12

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   18  
  

 

 

 

Balance at June 30, 2011

  $10  
  

 

 

 

Six Months Ended June 30, 2010

  

Balance at January 1, 2010

  $4  

Net purchases, sales, issuances and settlements

   (9

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   12  
  

 

 

 

Balance at June 30, 2010

  $7  
  

 

 

 
(a)Amounts relate to financial transmission rights.

   Derivatives
(net)
 
   (in millions) 

Nine months Ended September 30, 2011

  

Balance at January 1, 2011

  $4  

Total pre-tax realized or unrealized gains included in earnings:

  

Revenue, regulated electric(a)

   8  

Net purchases, sales, issuances and settlements:

  

Purchases(a)

   8  

Settlements

   (14
  

 

 

 

Balance at September 30, 2011

  $6  
  

 

 

 

Nine months Ended September 30, 2010

  

Balance at January 1, 2010

  $4  

Net purchases, sales, issuances and settlements

   (12

Total gains included on the Condensed Consolidated Balance Sheet as regulatory asset or liability

   12  
  

 

 

 

Balance at September 30, 2010

  $4  
  

 

 

 

(a)Amounts relate to financial transmission rights.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Additional Fair Value Disclosures - Long-term debt: The fair value of long-term debt is summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined as of JuneSeptember 30, 2011 and December 31, 2010 are not necessarily indicative of the amounts the Duke Energy Registrants could have settled in current markets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

   As of June 30, 2011 
   Duke Energy   Duke Energy
Carolinas
   Duke Energy Ohio   Duke Energy
Indiana
 
   Book
Value(a)
   Fair
Value
   Book
Value(a)
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
 
   (in millions) 

Long-term debt, including current maturities

  $18,695    $20,069    $8,268    $8,932    $2,562    $2,634    $3,470    $3,730  
   As of September 30, 2011 
   Duke Energy   Duke Energy
Carolinas
   Duke Energy Ohio   Duke Energy
Indiana
 
   Book
Value(a)
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
 
   (in millions) 

Long-term debt, including current maturities(a)

  $19,111    $21,346    $8,273    $9,469    $2,558    $2,685    $3,469    $3,977  

 

(a)Includes Non-recourse long-term debt of variable interest entities of $922$959 million for Duke Energy and $300 million for Duke Energy Carolinas.

 

   As of December 31, 2010 
   Duke Energy   Duke Energy
Carolinas
   Duke Energy Ohio   Duke Energy
Indiana
 
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
 
   (in millions) 

Long-term debt, including current maturities(a)

  $18,210    $19,484    $7,770    $8,376    $2,564    $2,614    $3,472    $3,746  

 

a)(a)Includes Non-recourse long-term debt of variable interest entities of $976 million for Duke Energy and $300 million for Duke Energy Carolinas.

At both JuneSeptember 30, 2011 and December 31, 2010, the fair value of cash and cash equivalents, accounts and notes receivable, accounts payable, commercial paper and non-recourse notes payables of variable interest entities are not materially different from their carrying amounts because of the short-term nature of these instruments and/or because the stated rates approximate market rates.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

10. Investments in Debt and Equity Securities

The Duke Energy Registrants classify their investments in debt and equity securities into two categories – trading and available-for-sale. Investments in debt and equity securities held in grantor trusts associated with certain deferred compensation plans and certain other investments are classified as trading securities and are reported at fair value in the Condensed Consolidated Balance Sheets with net realized and unrealized gains and losses included in earnings each period. All other investments in debt and equity securities are classified as available-for-sale securities, which are also reported at fair value on the Condensed Consolidated Balance Sheets with unrealized gains and losses excluded from earnings and reported either as a regulatory asset or liability, as discussed further below, or as a component of other comprehensive income until realized.

Trading Securities.Duke Energy holds investments in debt and equity securities in grantor trusts that are associated with certain deferred compensation plans. At JuneSeptember 30, 2011 and December 31, 2010, the fair value of these investments was $31$30 million and $29 million, respectively. Additionally, at December 31, 2010, Duke Energy held Windstream Corp. (Windstream) equity securities, which were received as proceeds from the sale of Duke Energy’s equity investment in Q-Comm Corporation during the fourth quarter of 2010. The fair value of these securities at December 31, 2010 was $87 million. Duke Energy subsequently sold these securities in the first quarter of 2011. Proceeds received from the sale of Windstream equity securities are reflected in Net proceeds from the sale of equity investments and other assets, and sales of and collections on notes receivable in the Duke Energy Condensed Consolidated Statement of Cash Flows.

Available for Sale Securities. Duke Energy’s available-for-sale securities are primarily comprised of investments held in the NDTF at Duke Energy Carolinas, investments in a grantor trust at Duke Energy Indiana related to other post-retirement benefit plans as required by the IURC, Duke Energy captive insurance investment portfolio, investments in short-term securities at Duke Energy International and investments of Duke Energy and Duke Energy Carolinas in auction rate debt securities. The investments within the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust are managed by independent investment managers with discretion to buy, sell and invest pursuant to the objectives set forth by the trust agreements. Therefore, Duke Energy Carolinas and Duke Energy Indiana have limited oversight of the day-to-day management of these investments. Since day-to-day investment decisions, including buy and sell decisions, are made by the investment manager, the ability to hold investments in unrealized loss positions is outside the control of Duke Energy Carolinas and Duke Energy Indiana. Accordingly, all unrealized gains and losses associated with equity securities within the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust are considered other-than-temporary and are recognized immediately when the fair value of individual investments is less than the cost basis of the investment. Pursuant to regulatory accounting, substantially all unrealized losses associated with investments in debt and equity securities within the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust are deferred as a regulatory asset or liability. As a result there is no immediate impact on the earnings of Duke Energy Carolinas and Duke Energy Indiana. For investments in debt and equity securities held in the captive insurance investment portfolio investments in short-term securities at Duke Energy International and investments in auction rate debt securities, unrealized gains and losses are included in other comprehensive income until realized, unless it is determined that the carrying value of an investment is other-than-temporarily impaired. If so, the write-down to fair value may be included in earnings based on the criteria discussed below.

For available-for-sale securities outside of the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust, which are discussed separately above, Duke Energy analyzes all investment holdings each reporting period to determine whether a decline in fair value

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

should be considered other-than-temporary. Criteria used to evaluate whether an impairment associated with equity securities is other-than-temporary includes, but is not limited to, the length of time over which the market value has been lower than the cost basis of the investment, the percentage decline compared to the cost of the investment and management’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If a decline in fair value is determined to be other-than-temporary, the investment is written down to its fair value through a charge to earnings.

With respect to investments in debt securities, under the accounting guidance for other-than-temporary impairment, if the entity does not have an intent to sell the security and it is not more likely than not that management will be required to sell the debt security before the recovery of its cost basis, the impairment write-down to fair value would be recorded as a component of other comprehensive income, except for when it is determined that a credit loss exists. In determining whether a credit loss exists, management considers, among other things, the length of time and the extent to which the fair value has been less than the amortized cost basis, changes in the financial condition of the issuer of the security, or in the case of an asset backed security, the financial condition of the underlying loan obligors, consideration of underlying collateral and guarantees of amounts by government entities, ability of the issuer of the security to make scheduled interest or principal payments and any changes to the rating of the security by rating agencies. If it is determined that a credit loss exists, the amount of impairment write-down to fair value would be split between the credit loss, which would be recognized in earnings, and the amount attributable to all other factors, which would be recognized in other comprehensive income. Management believes, based on consideration of the criteria above that no credit loss exists as of JuneSeptember 30, 2011 and December 31, 2010. Management does not have the intent to sell such investments in auction rate debt securities and the investments in debt securities within its captive insurance investment portfolio, and it is not more likely than not that management will be required to sell these securities before the anticipated recovery of their cost basis. Therefore, management has concluded that there were no other-than-temporary impairments necessary as of JuneSeptember 30, 2011 and December 31, 2010. Accordingly, all changes in the market value of investments in auction rate debt securities, short-term investments at Duke Energy International and captive insurance investments were reflected as a component of other comprehensive income in 2011 and 2010.

See Note 9 for additional information related to fair value measurements for investments in auction rate debt securities.

Management will continue to monitor the carrying value of its entire portfolio of investments in the future to determine if any other-than-temporary impairment losses should be recognized.

Investments in debt and equity securities are classified as either short-term investments or long-term investments based on management’s intent and ability to sell these securities, taking into consideration illiquidity factors in the current markets.

Short-term and Long-term investments. Duke Energy classifies its investments in debt and equity securities held in the Duke Energy Carolinas NDTF (see Note 9 for further information), the Duke Energy Indiana grantor trust and the captive insurance investment portfolio as long-term. Investments at Duke Energy International are classified as short-term and are available for current operations. Additionally, Duke Energy has classified $90$72 million carrying value ($11690 million par value) and $118 million carrying value ($149 million par value) of investments in auction rate debt securities as long-term at JuneSeptember 30, 2011 and December 31, 2010, respectively, due to market illiquidity factors as a result of continued failed auctions. All of these investments are classified as available-for-sale and, therefore, are reflected on the Condensed Consolidated Balance Sheets at estimated fair value based on either quoted market prices or management’s best estimate of fair value based on expected future cash flow using appropriate risk-adjusted discount rates. Since management does not intend to use these investments in current operations, these investments are classified as long-term.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

The estimated fair values of short-term and long-term investments classified as available-for-sale for Duke Energy, Duke Energy Carolinas and Duke Energy Indiana are as follows (in millions):

Duke Energy

 

  June 30, 2011   December 31, 2010   September 30, 2011   December 31, 2010 
  Gross
Unrealized
Holding
Gains(a)
   Gross
Unrealized
Holding
Losses(a)
 Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains(a)
   Gross
Unrealized
Holding
Losses(a)
 Estimated
Fair
Value
 

Short-term Investments(b)

  $—      $—     $146    $—      $—     $—    
  

 

   

 

  

 

   

 

   

 

  

 

 

Total short-term investments

  $—      $—     $146   $—      $—     $—    
Gross
Unrealized
Holding
Gains(a)
   Gross
Unrealized
Holding
Losses(a)
 Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains(a)
   Gross
Unrealized
Holding
Losses(a)
 Estimated
Fair
Value
   

 

   

 

  

 

   

 

   

 

  

 

 
  $537    $(19 $1,517    $481    $(16 $1,435    $334    $(60 $1,261    $481    $(16 $1,435  

Corporate Debt Securities

   9     (2  256     12     (3  270     8     (4  226     12     (3  270  

Municipal Bonds

   1     (8  63     1     (9  69     2     —      62     1     (9  69  

U.S. Government Bonds

   11     —      294     10     (1  235     21     —      373     10     (1  235  

Auction Rate Debt Securities(b)

   —       (26  99     —       (31  118  

Auction Rate Debt Securities(c)

   —       (19  72     —       (31  118  

Other

   6     (2  269     11     (5  274     5     (2  243     11     (5  274  
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

Total long-term investments

  $564    $(57 $2,498    $515    $(65 $2,401    $370    $(85 $2,237    $515    $(65 $2,401  
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

 

(a)The table above includes unrealized gains and losses of $551$364 million and $30$63 million, respectively, at JuneSeptember 30, 2011 and unrealized gains and losses of $505 million and $32 million, respectively, at December 31, 2010 associated with investments held in the NDTF. Additionally, the table above includes unrealized gains and losses of $9$2 million and an insignificant amount of unrealized losses,$1 million respectively, at JuneSeptember 30, 2011 and unrealized gains of $6 million and an insignificant amount of unrealized losses, respectively, at December 31, 2010 associated with investments held in the Duke Energy Indiana grantor trust. As discussed above, unrealized losses on investments within the NDTF and Duke Energy Indiana grantor trust are deferred as a regulatory asset pursuant to regulatory accounting treatment.
(b)At JuneSeptember 30, 2011, auction rate securities estimated fair value of $90 million are included in Other within Investments and Other Assets and estimated fair value of $9$25 million are classified as Short-Term Investments on the Condensed Consolidated Balance Sheets.
(c)At September 30, 2011, auction rate securities estimated fair value of $72 million are included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.

Debt securities held at JuneSeptember 30, 2011, which includesexcludes auction rate securities based on the stated maturity date, mature as follows: $64$115 million in less than one year, $178$292 million in one to five years, $199$235 million in six to 10 years and $441$383 million thereafter.

The fair values and gross unrealized losses of available-for-sale debt and equity securities which are in an unrealized loss position for which other-than-temporary impairment losses have not been recorded, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of JuneSeptember 30, 2011 and December 31, 2010.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

  As of June 30, 2011 As of December 31, 2010   As of September 30, 2011 As of December 31, 2010 
Fair
Value(a)
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 Fair
Value(a)
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
  Fair
Value(a)
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 Fair
Value(a)
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 

Equity Securities

  $104    $(12 $(7 $85    $(11 $(5  $241    $(13 $(47 $85    $(11 $(5

Corporate Debt Securities

   55     (1  (1  73     (2  (2   195     (1  (3  73     (2  (2

Municipal Bonds

   37     (7  (1  42     (8  (1   9     —      —      42     (8  (1

U.S. Government Bonds

   62     —      —      38     —      (1   84     —      —      38     —      (1

Auction Rate Debt Securities(b)

   90     (26  —      118     (31  —       71     (19  —      118     (31  —    

Other

   53     (2  —      84     (1  (3   115     (1  (1)  84     (1  (3
                       

 

   

 

  

 

  

 

   

 

  

 

 

Total long-term investments

  $401    $(48 $(9 $440    $(53 $(12  $715    $(34 $(51 $440    $(53 $(12
                       

 

   

 

  

 

  

 

   

 

  

 

 

 

(a)The table above includes fair values of $232$459 million and $226 million at JuneSeptember 30, 2011 and December 31, 2010, respectively, associated with investments held in the NDTF. Additionally, the table above includes fair values of $9$15 million and $5 million at JuneSeptember 30, 2011 and December 31, 2010, respectively, associated with investments held in the Duke Energy Indiana grantor trust.
(b)See Note 9 for information about fair value measurements related to investments in auction rate debt securities.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Duke Energy Carolinas

 

  June 30, 2011   December 31, 2010   September 30, 2011   December 31, 2010 
Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Estimated
Fair
Value
  Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Estimated
Fair
Value
 

Equity Securities

  $528    $(19 $1,452    $475    $(16 $1,365    $333    $(57 $1,206    $475    $(16 $1,365  

Corporate Debt Securities

   8     (2  204     10     (3  227     6     (3  174     10     (3  227  

Municipal Bonds

   —       (8  37     1     (9  43     1    —      34     1     (9  43  

U.S. Government Bonds

   11     —      268     10     —      224     20     —      346     10     —      224  

Auction Rate Debt Securities

   —       (3  12     —       (3  12     —       (3  12     —       (3  12  

Other

   4     (1  176     9     (4  155     4     (3  164     9     (4  155  
                        

 

   

 

  

 

   

 

   

 

  

 

 

Total long-term investments

  $551    $(33 $2,149    $505    $(35 $2,026    $364    $(66 $1,936    $505    $(35 $2,026  
                        

 

   

 

  

 

   

 

   

 

  

 

 

Debt securities held at JuneSeptember 30, 2011, which includesexcludes auction rate securities based on the stated maturity date, mature as follows: $53$83 million in less than one year, $119$131 million in one to five years, $162$202 million in six to 10 years and $351$302 million thereafter.

The fair values and gross unrealized losses of available-for-sale debt and equity securities which are in an unrealized loss position for which other-than-temporary impairment losses have not been recorded, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of JuneSeptember 30, 2011 and December 31, 2010.

 

  As of June 30, 2011 As of December 31, 2010   As of September 30, 2011 As of December 31, 2010 
Fair
Value
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 Fair
Value
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
  Fair
Value
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 Fair
Value
   Unrealized
Loss
Position
>12 months
 Unrealized
Loss
Position
<12 months
 

Equity Securities

  $99    $(12 $(7 $79    $(11 $(5  $220    $(13 $(44 $79    $(11 $(5

Corporate Debt Securities

   45     (1)  (1  59     (2  (1   60     (1  (2  59     (2  (1

Municipal Bonds

   28     (7)  (1  28     (8  (1   2     —      —      28     (8  (1

U.S. Government Bonds

   42     —      —      33     —      —       76     —      —      33     —      —    

Auction Rate Debt Securities(a)

   12     (3  —      12     (3  —       12     (3  —      12     (3  —    

Other

   18     (2  1    27     (1  (3   101     (1  (2  27     (1  (3
                       

 

   

 

  

 

  

 

   

 

  

 

 

Total long-term investments

  $244    $(25 $(8 $238    $(25 $(10  $471    $(18 $(48 $238    $(25 $(10
                       

 

   

 

  

 

  

 

   

 

  

 

 

 

(a)See Note 9 for information about fair value measurements related to investments in auction rate debt securities.

Duke Energy Indiana

   September 30, 2011   December 31, 2010 
  Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
  Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
   Estimated
Fair
Value
 

Equity Securities

  $1    $(1) $42    $6    $—      $47  

Municipal Bonds

   1     —      28     —       —       26  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term investments

  $2    $(1) $70    $6    $—      $73  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

Duke Energy Indiana

   June 30, 2011   December 31, 2010 
  Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
   Estimated
Fair
Value
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
   Estimated
Fair
Value
 

Equity Securities

  $8   $—      $49    $6   $—      $47  

Municipal Bonds

   1     —       27     —       —       26  
                              

Total long-term investments

  $9    $—      $76    $6    $—      $73  
                              

Debt securities held at JuneSeptember 30, 2011 mature as follows: $1 million in less than one year, $18$19 million in one to five years, $6$7 million in six to 10 years and $2$1 million thereafter.

At Duke Energy Indiana, as of June 30, 2011The fair values and December 31, 2010, $9 million and $14 million, respectively, carrying valuegross unrealized losses of available-for-sale debt and equity and debt securities werewhich are in an insignificant unrealized loss position for which other-than-temporary impairment losses have not been recorded.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

recorded, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of September 30, 2011 and December 31, 2010.

 

   As of September 30, 2011  As of December 31, 2010 
  Fair
Value
   Unrealized
Loss
Position
>12 months
   Unrealized
Loss
Position
<12 months
  Fair
Value
   Unrealized
Loss
Position
>12 months
   Unrealized
Loss
Position
<12 months
 

Equity Securities

  $8    $—      $(1 $—      $—      $—    

Municipal Bonds

   7     —       —      14     —       —    
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Total long-term investments

  $15    $—      $(1 $14    $—      $—    
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

11. Variable Interest Entities

A VIE is an entity that is evaluated for consolidation using more than a simple analysis of voting control. The analysis to determine whether an entity is a VIE considers contracts with an entity, credit support for an entity, the adequacy of the equity investment of an entity and the relationship of voting power to the amount of equity invested in an entity. This analysis is performed either upon the creation of a legal entity or upon the occurrence of an event requiring reevaluation, such as a significant change in an entity’s assets or activities. If an entity is determined to be a VIE, a qualitative analysis of control determines the party that consolidates a VIE based on what party has the power to direct the most significant activities of the VIE that impact its economic performance as well as what party has rights to receive benefits or is obligated to absorb losses that are significant to the VIE. The analysis of the party that consolidates a VIE is a continual reassessment.

CONSOLIDATED VIEs

The table below shows the VIEs that Duke Energy and Duke Energy Carolinas consolidate and how these entities impact Duke Energy’s and Duke Energy Carolinas’ respective Condensed Consolidated Balance Sheets. None of these entities is consolidated by Duke Energy Ohio or Duke Energy Indiana.

Other than the discussion below related to Cinergy Receivables, no financial support was provided to any of the consolidated VIEs during the three or sixnine months ended JuneSeptember 30, 2011 and the year ended December 31, 2010, respectively, or is expected to be provided in the future, that was not previously contractually required.

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

  Duke Energy   Duke Energy 
  Duke Energy
Carolinas
                     Duke Energy
Carolinas
                   
  Duke Energy
Receivables
Financing LLC
(DERF)
   Cinergy
Receivables
   CinCap V   Renewables Other   Total   Duke Energy
Receivables
Financing LLC
(DERF)
   Cinergy
Receivables
   CinCap V   Renewables Other   Total 
  (in millions)   (in millions) 

At June 30, 2011

           

At September 30, 2011

           

VIE Balance Sheets

                      

Restricted Receivables of VIEs

  $630    $518   $12    $10   $3    $1,173    $637    $492    $13    $7   $3    $1,152  

Other Current Assets

   —       —       4     163    8     175     —       —       4     82    8     94  

Intangibles, net

   —       —       —       13    —       13     —       —       —       12    —       12  

Restricted Other Assets of VIEs

   —       —       70     18    63     151     —       —       67     48    61     176  

Other Assets

   —       —       22     —      5     27     —       —       21     —      —       21  

Property, Plant and Equipment Cost, VIEs

   —       —       —       865    —       865     —       —       —       921    —       921  

Less Accumulated Depreciation and Amortization

   —       —       —       (44  —       (44   —       —       —       (53  —       (53

Other Assets and Deferred Debits

   —       —       —       25    1     26     —       —       —       25    9     34  
                         

 

   

 

   

 

   

 

  

 

   

 

 

Total Assets

   630     518     108     1,050    80     2,386     637     492     105     1,042    81     2,357  

Accounts Payable

   —       —       —       1    2     3     —       —       —       1    2     3  

Non-Recourse Notes Payable

   —       275     —       —      —       275     —       275     —       —      —       275  

Taxes Accrued

   —       —       —       3    —       3     —       —       —       3  �� —       3  

Current Maturities of Long-Term Debt

   —       —       10     30    4     44     —       —       10     57    5     72  

Other Current Liabilities

   —       —       5     16    —       21     —       —       5     57    —       62  

Non-Recourse Long-Term Debt

   300     —       66     492    64     922     300     —       63     533    63     959  

Deferred Income Taxes

   —       —       —       202    —       202     —       —       —       173    —       173  

Asset Retirement Obligation

   —       —       —       12    —       12     —       —       —       12    —       12  

Other Liabilities

   —       —       20     5    1     26     —       —       20     37    1     58  
                         

 

   

 

   

 

   

 

  

 

   

 

 

Total Liabilities

   300     275     101     761    71     1,508     300     275     98     873    71     1,617  
                         

 

   

 

   

 

   

 

  

 

   

 

 

Noncontrolling interests

   —       —       —       —      2     2     —       —       —       —      2     2  
                         

 

   

 

   

 

   

 

  

 

   

 

 

Net Duke Energy Corporation Shareholders’ Equity

  $330    $243    $7    $289   $7    $876    $337    $217    $7    $169   $8    $738  
                         

 

   

 

   

 

   

 

  

 

   

 

 

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

   Duke Energy 
   Duke Energy
Carolinas
                   
   Duke Energy
Receivables
Financing LLC
(DERF)
   Cinergy
Receivables
   CinCap V   Renewables  Other  Total 
   (in millions) 

At December 31, 2010

          

VIE Balance Sheets

          

Restricted Receivables of VIEs

  $637    $629    $12    $20   $4   $1,302  

Other Current Assets

   —       —       4     282    8    294  

Intangibles, net

   —       —       —       13    —      13  

Restricted Other Assets of VIEs

   —       —       76     (2  65    139  

Other Assets

   —       —       23     —      —      23  

Property, Plant and Equipment Cost, VIEs

   —       —       —       892    50    942  

Less Accumulated Depreciation and Amortization

   —       —       —       (26  (29  (55

Other Assets and Deferred Debits

   —       —       —       24    (3  21  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total Assets

   637     629     115     1,203    95    2,679  

Accounts Payable

   —       —       —       2    2    4  

Non-Recourse Notes Payable

   —       216     —       —      —      216  

Taxes Accrued

   —       —       —       1    —      1  

Current Maturities of Long-Term Debt

   —       —       9     45    7    61  

Other Current Liabilities

   —       —       5     16    —      21  

Non-Recourse Long-Term Debt

   300     —       71     518    87    976  

Deferred Income Taxes

   —       —       —       191    —      191  

Asset Retirement Obligation

   —       —       —       12    —      12  

Other Liabilities

   —       —       22     4    —      26  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total Liabilities

   300     216     107     789    96    1,508  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Noncontrolling interests

   —       —       —       —      1    1  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net Duke Energy Corporation Shareholders’ Equity

  $337    $413    $8    $414   $(2 $1,170  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

DERF. Duke Energy Carolinas securitizes certain accounts receivable through DERF, a bankruptcy remote, special purpose subsidiary. DERF is a wholly-owned limited liability company of Duke Energy Carolinas with a separate legal existence from its parent, and its assets are not intended to be generally available to creditors of Duke Energy Carolinas. As a result of the securitization, on a daily basis Duke Energy Carolinas sells certain accounts receivable, arising from the sale of electricity and/or related services as part of Duke Energy Carolinas’ franchised electric business, to DERF. In order to fund its purchases of accounts receivable, DERF has a $300 million secured credit facility with a commercial paper conduit, which expires in August 2012.2013. Duke Energy Carolinas provides the servicing for the receivables (collecting and applying the cash to the appropriate receivables). Duke Energy Carolinas’ borrowing under the credit facility is limited to the amount of qualified receivables sold, which has been and is expected to be in excess of the amount borrowed, which is maintained at $300 million. The debt is classified as long-term since the facility has an expiration date of greater than one year from the balance sheet date.

The obligations of DERF under the facility are non-recourse to Duke Energy Carolinas. Duke Energy and its subsidiaries have no requirement to provide liquidity, purchase assets of DERF or guarantee performance. DERF is considered a VIE because the equity capitalization is insufficient to support its operations. If deficiencies in the net worth of DERF were to occur, those deficiencies would be cured through funding from Duke Energy Carolinas. In addition, the most significant activity of DERF relates to the decisions made with respect to the management of delinquent receivables. Since those decisions are made by Duke Energy Carolinas and any net worth deficiencies of DERF would be cured through funding from Duke Energy Carolinas, Duke Energy Carolinas consolidates DERF.

Cinergy Receivables. Cinergy Receivables was formed in order to secure low cost financing for Duke Energy Ohio, including Duke Energy Kentucky, and Duke Energy Indiana. Duke Energy Ohio and Duke Energy Indiana sell on a revolving basis at a discount, nearly all of their customer accounts receivable and related collections to Cinergy Receivables. The receivables which are sold are selected in order to avoid any significant concentration of credit risk and exclude delinquent receivables. The receivables sold are securitized by Cinergy Receivables through a facility managed by two unrelated third parties and the receivables are used as collateral for commercial paper issued by the unrelated third parties. These loans provide the cash portion of the proceeds paid by Cinergy Receivables to Duke Energy Ohio and Duke Energy Indiana. The proceeds obtained by Duke Energy Ohio and Duke Energy Indiana from the sales of receivables are cash and a subordinated note from Cinergy Receivables (subordinated retained interest in the sold receivables) for a portion of the purchase price (typically approximates 25% of the total proceeds). The amount borrowed by Cinergy Receivables against these receivables is non-recourse to the general credit of Duke Energy, and the associated cash collections from the accounts receivable sold is the sole source of funds to satisfy the related debt obligation. Borrowing is limited to approximately 75% of the transferred receivables. Losses on collection in excess of the discount are first absorbed by the equity of Cinergy Receivables and next by the subordinated retained interests held by Duke Energy

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

Ohio and Duke Energy Indiana. The discount on the receivables reflects interest expense plus an allowance for bad debts net of a servicing fee charged by Duke Energy Ohio and Duke Energy Indiana. Duke Energy Ohio and Duke Energy Indiana are responsible for the servicing of the receivables (collecting and applying the cash to the appropriate receivables). Depending on the experience with collections, additional equity infusions to Cinergy Receivables may be required to be made by Duke Energy in order to maintain a minimum equity balance of $3 million. For each of the sixnine months ended JuneSeptember 30, 2011, Duke Energy infused $6 million of equity to Cinergy Receivables to remedy net worth deficiencies. For the three and nine months ended September 30, 2010, Duke Energy infused $6$4 million and $10 million, respectively, of equity to Cinergy Receivables to remedy net worth deficiencies. The amount borrowed fluctuates based on the amount of receivables sold. The debt is short-term because the facility has an expiration date of less than one year from the balance sheet date. The current expiration date is October 2011; however, Duke Energy extended the expiration date to October 2012 subsequent to September 30, 2011. Cinergy Receivables is considered a VIE because the equity capitalization is insufficient to support its operations, the power to direct the most significant activities of the entity are not performed by the equity holder, Cinergy, and deficiencies in the net worth of Cinergy Receivables are not funded by Cinergy, but by Duke Energy. The most significant activity of Cinergy Receivables relates to the decisions made with respect to the management of delinquent receivables. These decisions, as well as the requirement to make up deficiencies in net worth, are made by Duke Energy and not by Duke Energy Ohio, Duke Energy Kentucky or Duke Energy Indiana. Thus, Duke Energy consolidates Cinergy Receivables. Neither Duke Energy Ohio or Duke Energy Indiana consolidate Cinergy Receivables.

CinCap V.CinCap V was created to finance and execute a power sale agreement with Central Maine Power Company for approximately 35 MW of capacity and energy. This agreement expires in 2016. CinCap V is considered a VIE because the equity capitalization is insufficient to support its operations. As Duke Energy has the power to direct the most significant activities of the entity, which are the decisions to hedge and finance the power sales agreement, CinCap V is consolidated by Duke Energy.

Renewables. Duke Energy’s renewable energy facilities include Green Frontier Windpower, LLC, Top of The World Wind Energy LLC and TX Solar I, LLC,various solar projects, all subsidiaries of DEGS, an indirect wholly-owned subsidiary of Duke Energy.

These renewable energy facilities are VIEs due to power purchase agreements with terms that approximate the expected life of the projects. These fixed price agreements effectively transfer the commodity price risk to the buyer of the power. Duke Energy has consolidated these entities since inception because the most significant activities that impact the economic performance of these renewable energy facilities were the decisions associated with the siting, negotiation of the purchase power agreement, engineering, procurement and construction, and decisions associated with ongoing operations and maintenance related activities, all of which were made solely by Duke Energy.

The debt held by these renewable energy facilities is non-recourse to the general credit of Duke Energy. Duke Energy and its subsidiaries have no requirement to provide liquidity or purchase the assets of these renewable energy facilities. Duke Energy does not guarantee performance except for an immaterial Green Frontier Windpower, LLC multi-purpose letter of credit and various immaterial debt service reserve and operations and maintenance reserve guarantees at Top of the World Wind Energy LLC and TX Solar I, LLC.guarantees. The assets are restricted and they cannot be pledged as collateral or sold to third parties without the prior approval of the debt holders.

Other. Duke Energy has other VIEs with restricted assets and non-recourse debt. These VIEs include certain on-site power generation facilities. Duke Energy consolidates these particular on-site power generation entities because Duke Energy has the power to direct the majority of the most significant activities, which, most notably involve the oversight of operation and maintenance related activities that impact the economic performance of these entities.

During the second quarter of 2011, the customer for an on-site generation facility cancelled its contract. As a result, the entity providing the on-site generation services no longer has any activity or assets, other than a receivable with payments to be collected through 2017. As of JuneSeptember 30, 2011, Duke Energy no longer consolidates this entity.

NON-CONSOLIDATED VIEs

The table below shows the VIEs that the Duke Energy Registrants do not consolidate and how these entities impact Duke Energy’s, Duke Energy Ohio’s and Duke Energy Indiana’s respective Condensed Consolidated Balance Sheets. As discussed above, while Duke Energy consolidates Cinergy Receivables, Duke Energy Ohio and Duke Energy Indiana do not consolidate Cinergy Receivables as they are not the primary beneficiary.

                  Duke Energy           Duke Energy 
  Duke Energy
Ohio
       Duke Energy
Indiana
       DukeNet   Renewables   Other   Total   Duke Energy
Ohio
   Duke Energy
Indiana
   DukeNet   Renewables   Other   Total 

At June 30, 2011

                  

Consolidated Balance Sheets

                  

At September 30, 2011

Consolidated Balance Sheets

              

Receivables

  $108       $127       $—      $—      $—      $—      $87    $122    $—      $—      $—      $—    

Investments in equity method

unconsolidated affiliates

   —          —          132     91     25     248     —       —       130     84     25     239  

Intangibles

   115        —          —       —       115     115     113     —       —       —       113     113  
  

 

      

 

      

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Assets

   223        127        132     91     140     363     200     122     130     84     138     352  

Other Current Liabilities

   —          —          —       —       3     3     —       —       —       —       1     1  

Deferred Credits and Other Liabilities

   —          —          —       —       18     18     —       —       —       —       18     18  
  

 

      

 

      

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Liabilities

   —          —          —       —       21     21     —       —       —       —       19     19  
  

 

      

 

      

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net Duke Energy Corporation Shareholders’ Equity

  $223       $127       $132    $91    $119    $342    $200    $122    $130    $84    $119    $333  
  

 

      

 

      

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

                  Duke Energy           Duke Energy 
  Duke Energy
Ohio
       Duke Energy
Indiana
       DukeNet   Renewables   Other   Total   Duke Energy
Ohio
   Duke Energy
Indiana
   DukeNet   Renewables   Other   Total 

At December 31, 2010

                  

Consolidated Balance Sheets

                  

At December 31, 2010

Consolidated Balance Sheets

              

Receivables

  $216       $192       $—      $—      $—      $—      $216    $192    $—      $—      $—      $—    

Investments in equity method unconsolidated affiliates

   —          —          137     95     23     255     —       —       137     95     23     255  

Intangibles

   119        —          —       —       119     119     119     —       —       —       119     119  
                                

 

   

 

   

 

   

 

   

 

   

 

 

Total Assets

   335        192        137     95     142     374     335     192     137     95     142     374  

Other Current Liabilities

   —          —          —       —       3     3     —       —       —       —       3     3  

Deferred Credits and Other Liabilities

   —          —          —       —       28     28     —       —       —       —       28     28  
                                

 

   

 

   

 

   

 

   

 

   

 

 

Total Liabilities

   —          —          —       —       31     31     —       —       —       —       31     31  
                                

 

   

 

   

 

   

 

   

 

   

 

 

Net Duke Energy Corporation Shareholders’ Equity

  $335       $192       $137    $95    $111    $343    $335    $192    $137    $95    $111    $343  
                                

 

   

 

   

 

   

 

   

 

   

 

 

No financial support that was not previously contractually required was provided to any of the unconsolidated VIEs during the three and sixnine months ended JuneSeptember 30, 2011 and the year ended December 31, 2010, respectively, or is expected to be provided in the future.

With the exception of the power purchase agreement with the Ohio Valley Electric Corporation (OVEC), which is discussed below, and various guarantees, reflected in the table above as “Deferred Credits and Other Liabilities”, the Duke Energy Registrants are not aware of any situations where the maximum exposure to loss significantly exceeds the carrying values shown above.

Cinergy Receivables. As discussed above, Cinergy Receivables is consolidated only by Duke Energy. Accordingly, the retained interest in the sold receivables recorded on the Condensed Consolidated Balance Sheets of Duke Energy Ohio and Duke Energy Indiana are eliminated in consolidation at Duke Energy.

The proceeds obtained from the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the purchase price (typically approximates 25% of the total proceeds). The subordinated note is a retained interest (right to receive a specified portion of cash flows from the sold assets) and is classified within Receivables in Duke Energy Ohio’s and Duke Energy Indiana’s Condensed Consolidated Balance Sheets at JuneSeptember 30, 2011 and December 31, 2010. The retained interests reflected on the Condensed Consolidated Balance Sheets of Duke Energy Ohio and Duke Energy Indiana approximate fair value.

The carrying values of the retained interests are determined by allocating the carrying value of the receivables between the assets sold and the interests retained based on relative fair value. Because the receivables generally turnover in less than two months, credit losses are reasonably predictable due to the broad customer base and lack of significant concentration, and the purchased beneficial interest (equity in Cinergy Receivables) is subordinate to all retained interests and thus would absorb losses first, the allocated basis of the subordinated notes are not materially different than their face value. The hypothetical effect on the fair value of the retained interests assuming both a 10% and a 20% unfavorable variation in credit losses or discount rates is not material due to the short turnover of receivables and historically low credit loss history. Interest accrues to Duke Energy Ohio, Duke Energy Indiana and Duke Energy Kentucky on the retained interests using the accretable yield method, which generally approximates the stated rate on the notes since the allocated basis and the face value are nearly equivalent. An impairment charge is recorded against the carrying value of both the retained interests and purchased beneficial interest whenever it is determined that an other-than-temporary impairment has occurred. The key assumptions used in estimating the fair value in 2011 and 2010 is detailed in the following table:

 

   2011  2010 

Duke Energy Ohio

   

Anticipated credit loss ratio

   0.8  0.8

Discount rate

   2.6  2.7

Receivable turnover rate

   12.7  12.6

Duke Energy Indiana

   

Anticipated credit loss ratio

   0.4  0.5

Discount rate

   2.6  2.7

Receivable turnover rate

   10.2  10.2

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

The following table shows the gross and net receivables sold as of JuneSeptember 30, 2011 and December 31, 2010, respectively:

 

   Duke Energy Ohio   Duke Energy Indiana 

Receivables sold as of June 30, 2011

  $279    $273  

Less: Retained interests

   108     127  
          

Net receivables sold as of June 30, 2011

  $171    $146  
          
   Duke Energy Ohio   Duke Energy Indiana 

Receivables sold as of December 31, 2010

  $373    $284  

Less: Retained interests

   216     192  
          

Net receivables sold as of December 31, 2010

  $157    $92  
          
   Duke Energy Ohio   Duke Energy Indiana 

Receivables sold as of September 30, 2011

  $262    $262  

Less: Retained interests

   87     122  
  

 

 

   

 

 

 

Net receivables sold as of September 30, 2011

  $175    $140  
  

 

 

   

 

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

   Duke Energy Ohio   Duke Energy Indiana 

Receivables sold as of December 31, 2010

  $373    $284  

Less: Retained interests

   216     192  
  

 

 

   

 

 

 

Net receivables sold as of December 31, 2010

  $157    $92  
  

 

 

   

 

 

 

The following table shows the retained interests, sales, and cash flows during the three and sixnine months ended JuneSeptember 30, 2011 and 2010, respectively:

 

Three Months Ended June 30, 2011  Duke Energy Ohio   Duke Energy Indiana 

Sales

    

Receivables sold

  $521    $630  

Loss recognized on sale

   5     4  

Cash flows

    

Cash proceeds from receivables sold

  $560    $646  

Return received on retained interests

   3     3  
Three Months Ended June 30, 2010  Duke Energy Ohio   Duke Energy Indiana 

Sales

    

Receivables sold

  $617    $586  

Loss recognized on sale

   6     4  

Cash flows

    

Cash proceeds from receivables sold

  $611    $553  

Collection fees received

   1     —    

Return received on retained interests

   3     4  

Six Months Ended June 30, 2011  Duke Energy Ohio   Duke Energy Indiana 
Three Months Ended September 30, 2011  Duke Energy Ohio   Duke Energy Indiana 

Sales

        

Receivables sold

  $1,240    $1,298    $592    $711  

Loss recognized on sale

   11     8     5     5  

Cash flows

        

Cash proceeds from receivables sold

  $1,337    $1,355    $615    $696  

Return received on retained interests

   7     7     3     3  
Six Months Ended June 30, 2010  Duke Energy Ohio   Duke Energy Indiana 
Three Months Ended September 30, 2010  Duke Energy Ohio   Duke Energy Indiana 

Sales

        

Receivables sold

  $1,506    $1,207    $672    $686  

Loss recognized on sale

   14     8     5     5  

Cash flows

        

Cash proceeds from receivables sold

  $1,529    $1,200    $707    $704  

Collection fees received

   1     —       —       1  

Return received on retained interests

   8     7     4     3  
Nine Months Ended September 30, 2011  Duke Energy Ohio   Duke Energy Indiana 

Sales

    

Receivables sold

  $1,832    $2,009  

Loss recognized on sale

   16     13  

Cash flows

    

Cash proceeds from receivables sold

  $1,952    $2,051  

Collection fees received

   1     1  

Return received on retained interests

   10     10  
Nine Months Ended September 30, 2010  Duke Energy Ohio   Duke Energy Indiana 

Sales

    

Receivables sold

  $2,178    $1,893  

Loss recognized on sale

   19     13  

Cash flows

    

Cash proceeds from receivables sold

  $2,236    $1,904  

Collection fees received

   1     1  

Return received on retained interests

   12     10  

Cash flows from the sale of receivables are reflected within Operating Activities on Duke Energy Ohio’s and Duke Energy Indiana’s Condensed Consolidated Statements of Cash Flows.

Collection fees received in connection with the servicing of transferred accounts receivable are included in Operation, Maintenance and Other on Duke Energy Ohio’s and Duke Energy Indiana’s Condensed Consolidated Statements of Operations.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

The loss recognized on the sale of receivables is calculated monthly by multiplying the receivables sold during the month by the required discount which is derived monthly utilizing a three year weighted average formula that considers charge-off history, late charge history, and turnover history on the sold receivables, as well as a component for the time value of money. The discount rate, or component for the time value of money, is calculated monthly by summing the prior month-end LIBOR plus a fixed rate of 2.39%.

DukeNet. In 2010, Duke Energy sold a 50% ownership interest in DukeNet to Alinda. The sale resulted in DukeNet becoming a joint venture with Duke Energy and Alinda each owning a 50% interest. In connection with the formation of the new DukeNet joint venture, a five-year, $150 million senior secured credit facility was executed with a syndicate of ten external financial institutions. This credit facility is non-recourse to Duke Energy. DukeNet is considered a VIE because it has entered into certain contractual arrangements that provide DukeNet with additional forms of subordinated financial support. The most significant activities that impact DukeNet’s economic performance relate to its business development and fiber optic capacity marketing and management activities. The power to direct these activities is jointly and equally shared by Duke Energy and Alinda. As a result, Duke Energy does not consolidate the DukeNet joint venture. Accordingly, DukeNet is a non-consolidated VIE that is reported as an equity method investment.

Unless consent by Duke Energy is given otherwise, Duke Energy and its subsidiaries have no requirement to provide liquidity, purchase the assets of DukeNet, or guarantee performance.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Renewables. Duke Energy’s Commercial Power business segment has investments in various entities that generate electricity through the use of renewable energy technology. Some of these entities are VIEs which are not consolidated due to the joint ownership of the entities when they were created. Instead, Duke Energy’s investment is recorded under the equity method of accounting. These entities are VIEs due to power purchase agreements with terms that approximate the expected life of the project. These fixed price agreements effectively transfer the commodity price risk to the buyer of the power.

Other. Duke Energy’s Commercial Power business segment has investments in various other entities that are VIEs which are not consolidated. The most significant of these investments is Duke Energy Ohio’s 9% ownership interest in OVEC. Through its ownership interest in OVEC, Duke Energy Ohio has a contractual arrangement through June 2040 to buy power from OVEC’s power plants. The proceeds from the sale of power by OVEC to its power purchase agreement counterparties, including Duke Energy Ohio, are designed to be sufficient for OVEC to meet its operating expenses, fixed costs, debt amortization and interest expense, as well as earn a return on equity. Accordingly, the value of this contract is subject to variability due to fluctuations in power prices and changes in OVEC’s costs of business, including costs associated with its 2,256 megawatts of coal-fired generation capacity. As discussed in Note 5, the proposed rulemaking on cooling water intake structures, utility boiler MACT, CSAPR and CCP’s could increase the costs of OVEC which would be passed through to Duke Energy Ohio. The initial carrying value of this contract was recorded as an intangible asset when Duke Energy acquired Cinergy in April 2006.

In addition, the company has guaranteed the performance of certain entities in which the company no longer has an equity interest. As a result, the company has a variable interest in certain other VIEs that are non-consolidated.

12. Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income attributable to Duke Energy common stockholders, adjusted for distributed and undistributed earnings allocated to participating securities, by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to Duke Energy common stockholders, as adjusted for distributed and undistributed earnings allocated to participating securities, by the diluted weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, phantom shares and stock-based performance unit awards were exercised or settled.

The following table illustrates Duke Energy’s basic and diluted EPS calculations and reconciles the weighted-average number of common shares outstanding to the diluted weighted-average number of common shares outstanding for the three and sixnine months ended JuneSeptember 30, 2011 and 2010.

  Income Average
Shares
   EPS   Income   Average
Shares
   EPS 
  (in millions, except per-
share amounts)
   (in millions, except per-
share amounts)
 

Three Months Ended June 30, 2011

     

Three Months Ended September 30, 2011

      

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—basic

  $434    1,332    $0.33    $471     1,332    $0.35  
     

 

       

 

 

Effect of dilutive securities:

           

Stock options, performance and restricted stock

    1         1    
  

 

  

 

     

 

   

 

   

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—diluted

  $434    1,333    $0.33    $471     1,333    $0.35  
  

 

  

 

   

 

   

 

   

 

   

 

 

Three Months Ended June 30, 2010

     

Loss from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—basic and diluted

  $(223  1,314    $(0.17

Three Months Ended September 30, 2010

      

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—basic

  $669     1,320    $0.51  
  

 

  

 

   

 

       

 

 

Effect of dilutive securities:

      

Stock options, performance and restricted stock

     2    
  

 

   

 

   

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—diluted

  $669     1,322    $0.51  
  

 

   

 

   

 

 

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

  Income   Average
Shares
   EPS   Income   Average
Shares
   EPS 
  (in millions, except per-
share amounts)
   (in millions, except per-
share amounts)
 

Six Months Ended June 30, 2011

      

Nine Months Ended September 30, 2011

      

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—basic

  $944     1,331    $0.71    $1,415     1,331    $1.06  
      

 

       

 

 

Effect of dilutive securities:

            

Stock options, performance and restricted stock

     1         1    
  

 

   

 

     

 

   

 

   

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—diluted

  $944     1,332    $0.71    $1,415     1,332    $1.06  
  

 

   

 

   

 

   

 

   

 

   

 

 

Six Months Ended June 30, 2010

      

Nine Months Ended September 30, 2010

      

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—basic

  $221     1,312    $0.17    $891     1,315    $0.68  
      

 

       

 

 

Effect of dilutive securities:

            

Stock options, performance and restricted stock

     1         1    
  

 

   

 

     

 

   

 

   

Income from continuing operations attributable to Duke Energy common stockholders, as adjusted for participating securities—diluted

  $221     1,313    $0.17    $891     1,316    $0.68  
  

 

   

 

   

 

   

 

   

 

   

 

 

As of JuneSeptember 30, 2011 and 2010, 11 million and 1916 million, respectively, of stock options and performance and unvested stock awards were not included in the “effect of dilutive securities” in the above table because either the option exercise prices were greater than the average market price of the common shares during those periods, or performance measures related to the awards had not yet been met.

During the three and sixnine months ended JuneSeptember 30, 2010, Duke Energy received proceeds of $77$98 million and $108$205 million, respectively, from the sale of common stock issued to fulfill obligations under its Dividend Reinvestment Plan (DRIP) and other internal plans, including 401(k) plans.

13. Stock-Based Compensation

For employee awards, equity classified stock-based compensation cost is measured at the service inception date or the grant date, based on the estimated achievement of certain performance metrics or the fair value of the award, and is recognized as expense or capitalized as a component of property, plant and equipment over the requisite service period.

Duke Energy recorded pre-tax stock-based compensation expense for each of the three and sixnine months ended JuneSeptember 30, 2011 and 2010 as follows:

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2011(a)   2010(a)   2011(a)   2010(a)   2011(a)   2010(a)   2011(a)   2010(a) 
  (in millions)   (in millions)   (in millions)   (in millions) 

Stock Options

  $—      $—      $2    $2    $—      $—      $2    $2  

Phantom Awards

   6     6     14     14     6     7     20     21  

Performance Awards

   5     6     11     12     6     11     17     23  

Other Stock Awards

   —       1     —       1  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $11    $12    $27    $28    $12    $19    $39    $47  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Excludes stock-based compensation cost capitalized of approximately $1 million and $2$3 million for each of the three and sixnine months, respectively, ended JuneSeptember 30, 2011 and 2010.

The tax benefit associated with the recorded expense for each of the three months ended JuneSeptember 30, 2011 and 2010 was $5 million.million and $7 million, respectively. The tax benefit associated with the recorded expense for each of the sixnine months ended JuneSeptember 30, 2011 and 2010 was $11 million.$16 million and $18 million, respectively.

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

14. Employee Benefit Obligations

Net periodic benefit costs disclosed in the tables below for the qualified pension, non-qualified pension and other post-retirement benefit plans represent the cost of the respective benefit plan to the Duke Energy Registrants for the periods presented. However, portions of the net periodic benefit costs disclosed in the tables below have been capitalized as a component of property, plant and equipment.

Duke Energy

The following table shows the components of the net periodic benefit costs for the Duke Energy U.S. qualified and non-qualified pension plans and other post-retirement benefit plans.

 

  Three Months Ended
June 30, 2011
 Three Months Ended
June 30, 2010
   Three Months Ended
September 30, 2011
 Three Months Ended
September 30, 2010
 
  Qualified
pension
plans(a)
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
 Qualified
pension
plans(a)
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
   Qualified
pension
plans(a)
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
 Qualified
pension
plans(a)
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
 
  (in millions)   (in millions) 

Service cost

  $24   $1    $3   $24   $—      $2    $24   $—      $1   $24   $—      $1  

Interest cost on benefit obligation

   58    2     9    62    2     11     58    2     8    62    2     9  

Expected return on plan assets

   (96  —       (4  (95  —       (4   (96  —       (3  (94  —       (3

Amortization of prior service cost (credit)

   1    —       (2  2    —       (5   1    —       (2  1    1     (2

Amortization of net transition liability

   —      —       2    —      —       2     —      —       2    —      —       4  

Amortization of loss (gain)

   19    —       (1  13    —       1     20    1     —      12    —       (2

Other

   5    —       —      4    —       —       4    —       —      5    —       —    
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Net periodic costs

  $11   $3    $7   $10   $2    $7    $11   $3    $6   $10   $3    $7  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

 

(a)Excludes regulatory asset amortization of $3 million and $4 million for each of the three months ended JuneSeptember 30, 2011 and 2010, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.
(b)Excludes regulatory asset amortization of $2 million for each of the three months ended September 30, 2011 and 2010, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

   Nine Months Ended
September 30, 2011
  Nine Months Ended
September 30, 2010
 
   Qualified
pension
plans(a)
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
  Qualified
pension
plans(a)
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
 
   (in millions) 

Service cost

  $72   $1    $5   $72   $1    $5  

Interest cost on benefit obligation

   174    6     26    186    6     29  

Expected return on plan assets

   (288  —       (11  (283  —       (11

Amortization of prior service cost (credit)

   4    1     (6  4    2     (6

Amortization of net transition liability

   —      —       7    —      —       8  

Amortization of loss (gain)

   58    1     (2  37    —       (4

Contractual termination benefit cost

   —      —       —      10    —       —    

Other

   13    —       —      14    —       —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net periodic costs

  $33   $9    $19   $40   $9    $21  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

(a)Excludes regulatory asset amortization of $11 million and $12 million for the nine months ended September 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.
(b)Excludes regulatory asset amortization of $2$6 million and $3$7 million for the threenine months ended June 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

   Six Months Ended
June 30, 2011
  Six Months Ended
June 30, 2010
 
   Qualified
pension
plans(a)
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
  Qualified
pension
plans(a)
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans(b)
 
   (in millions) 

Service cost

  $48   $1    $4   $48   $1    $4  

Interest cost on benefit obligation

   116    4     18    124    4     20  

Expected return on plan assets

   (192  —       (8  (189  —       (8

Amortization of prior service cost (credit)

   3    1     (4  3    1     (8

Amortization of net transition liability

   —      —       5    —      —       4  

Amortization of loss (gain)

   38    —       (2  25    —       2  

Contractual termination benefit cost

   —      —       —      10    —       —    

Other

   9    —       —      9    —       —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net periodic costs

  $22   $6    $13   $30   $6    $14  
  

 

 

  

 

 

   

 

 

�� 

 

 

  

 

 

   

 

 

 

(a)Excludes regulatory asset amortization of $7 million and $8 million for the six months ended June 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.
(b)Excludes regulatory asset amortization of $4 million and $5 million for the six months ended JuneSeptember 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

Each of the Subsidiary Registrants participate in qualified pension plans, non-qualified pension plans and other post-retirement benefit plans sponsored by Duke Energy. The net periodic benefit costs shown in the tables below represent the allocated cost of the respective benefit plan for the periods presented. Additionally, the Subsidiary Registrants are allocated their proportionate share of pension and other post-retirement benefit cost for employees of Duke Energy’s shared services affiliate that provide support to the respective Subsidiary Registrant. These allocated amounts are included in the governance and shared services costs for each Subsidiary Registrant discussed in Note 17.

Duke Energy Carolinas

   Three Months Ended
September 30, 2011
  Three Months Ended
September 30, 2010
 
   Qualified
pension
plans
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $9   $—      $—     $9   $—      $1  

Interest cost on benefit obligation

   21    —       4    23    —       4  

Expected return on plan assets

   (37  —       (2  (37  —       (3

Amortization of prior service cost (credit)

   1    —       (1  1    1    (1

Amortization of net transition liability

   —      —       2    —      —       2  

Amortization of loss

   9    —       1    6    —       1  

Other

   1    —       —      2    —       —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net periodic costs

  $4   $—      $4   $4   $1   $4  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

Duke Energy Carolinas

   Three Months Ended
June 30, 2011
  Three Months Ended
June 30, 2010
 
   Qualified
pension
plans
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $10   $—      $1   $9   $—      $1  

Interest cost on benefit obligation

   22    1     4    22    —       5  

Expected return on plan assets

   (38  —       (3  (36  —       (3

Amortization of prior service credit

   —      —       (2  —      —       (2

Amortization of net transition liability

   —      —       3    —      —       3  

Amortization of loss

   9    —       —      7    —       —    

Other

   2    —       —      2    —       —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net periodic costs

  $5   $1    $3   $4   $—      $4  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

  Six Months Ended
June 30, 2011
 Six Months Ended
June 30, 2010
   Nine Months Ended
September 30, 2011
 Nine Months Ended
September 30, 2010
 
  Qualified
pension
plans
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
 Qualified
pension
plans
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
   Qualified
pension
plans
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
 Qualified
pension
plans
 Non-
Qualified
pension
plans
   Other Post-
Retirement
Benefit
plans
 
  (in millions)   (in millions) 

Service cost

  $19   $—      $1   $18   $—      $1    $28   $—      $1   $27   $—      $2  

Interest cost on benefit obligation

   43    1     8    45    1     9     64    1     12    68    1     13  

Expected return on plan assets

   (75  —       (5  (73  —       (5   (112  —       (7  (110  —       (8

Amortization of prior service credit

   —      —       (3  —      —       (3   1   —       (4  1    1     (4

Amortization of net transition liability

   —      —       5    —      —       5     —      —       7    —      —       7  

Amortization of loss

   18    —       1    14    —       1     27    —       2    20    —       2  

Other

   4    —       —      4    —       —       5    —       —      6    —       —    
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Net periodic costs

  $9   $1    $7   $8   $1    $8    $13   $1    $11   $12   $2    $12  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

See Note 17 for additional information related to amounts reflected on Duke Energy Carolinas’ Condensed Consolidated Balance Sheets associated with obligations related to qualified pension plans, non-qualified pension plans and other post-retirement benefit plans, which are allocated to Duke Energy Carolinas by Duke Energy.

Duke Energy Ohio

 

  Three Months Ended
June 30, 2011
 Three Months Ended
June 30, 2010
   Three Months Ended
September 30, 2011
 Three Months Ended
September 30, 2010
 
  Qualified
pension
plans(a)
 Qualified
pension
plans(a)
   Qualified
pension
plans(a)
 Other Post-
Retirement
Benefit
plans(b)
 Qualified
pension
plans(a)
 Other Post-
Retirement
Benefit
plans(b)
 
  (in millions)   (in millions) 

Service cost

  $1   $1    $2   $1   $2   $1  

Interest cost on projected benefit obligation

   8    8     8    1    8    2  

Expected return on plan assets

   (11  (9   (11  —      (11  (1

Amortization of loss

   2    1  

Amortization of prior service (credit) cost

   —      (1  1    (1

Amortization of loss (gain)

   2    (1  1    (1

Other

   1    —       1    —      —      —    
  

 

  

 

   

 

  

 

  

 

  

 

 

Net periodic costs

  $1   $1    $2   $—     $1   $—    
  

 

  

 

   

 

  

 

  

 

  

 

 

 

(a)Excludes regulatory asset amortization of $1 million and $2 million for each of the three months ended JuneSeptember 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

   Six Months Ended
June 30, 2011
  Six Months Ended
June 30, 2010
 
   Qualified
pension
plans(a)
  Other Post-
Retirement
Benefit
plans(b)
  Qualified
pension
plans(a)
  Other Post-
Retirement
Benefit
plans(b)
 
   (in millions) 

Service cost

  $3   $—     $3   $—    

Interest cost on projected benefit obligation

   16    1    17    1  

Expected return on plan assets

   (22  —      (21  —    

Amortization of loss (gain)

   4    (1  2    (1

Other

   1    —      1    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $2   $—     $2   $—    
  

 

 

  

 

 

  

 

 

  

 

 

 

(a)Excludes regulatory asset amortization of $3 million and $4 million for the six months ended June 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.
(b)Excludes regulatory asset amortization of $1 million and $2 million for the three months ended September 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

   Nine Months Ended
September 30, 2011
  Nine Months Ended
September 30, 2010
 
   Qualified
pension
plans(a)
  Other Post-
Retirement
Benefit
plans(b)
  Qualified
pension
plans(a)
  Other Post-
Retirement
Benefit
plans(b)
 
   (in millions) 

Service cost

  $5   $1   $5   $1  

Interest cost on projected benefit obligation

   24    2    25    3  

Expected return on plan assets

   (33  —      (32  (1

Amortization of prior service (credit) cost

   —      (1  1    (1

Amortization of loss (gain)

   6    (2  3    (2

Other

   2    —      1    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $4   $—     $3   $—    
  

 

 

  

 

 

  

 

 

  

 

 

 

(a)Excludes regulatory asset amortization of $5 million and $6 million for the nine months ended September 30, 2011 and 2010, respectively, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

(b)Excludes regulatory asset amortization of $2 million for each of the sixnine months ended JuneSeptember 30, 2011 and 2010, resulting from purchase accounting adjustments associated with Duke Energy’s merger with Cinergy in April 2006.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Components of net periodic costs for Duke Energy Ohio’s non-qualified pension plans were an insignificant amount for the three and sixnine months ended June 30, 2011 and 2010. Components of net periodic costs for Duke Energy Ohio’s other post-retirement benefit plans were an insignificant amount for the three months ended JuneSeptember 30, 2011 and 2010.

See Note 17 for additional information related to amounts reflected on Duke Energy Ohio’s Condensed Consolidated Balance Sheets associated with obligations related to qualified pension plans, non-qualified pension plans and other post-retirement benefit plans, which are allocated to Duke Energy Ohio by Duke Energy.

Duke Energy Indiana

 

   Three Months Ended
June 30, 2011
  Three Months Ended
June 30, 2010
 
   Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $2   $—     $2   $—    

Interest cost on projected benefit obligation

   8    2    8    2  

Expected return on plan assets

   (11  (1  (11  (1)

Amortization of prior service cost

   1   —      —      —    

Amortization of loss

   3    1    4    1 

Other

   1    —      1    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $4   $2   $4   $2  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Six Months Ended
June 30, 2011
  Six Months Ended
June 30, 2010
 
   Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $5   $—     $5   $—    

Interest cost on projected benefit obligation

   15    4    16    4  

Expected return on plan assets

   (22  (1  (22  (1

Amortization of prior service cost

   1    —      1    —    

Amortization of loss

   7    1    6    1 

Other

   1    —      1    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $7   $4   $7   $4  
  

 

 

  

 

 

  

 

 

  

 

 

 

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

   Three Months Ended
September 30, 2011
  Three Months Ended
September 30, 2010
 
   Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $3   $1   $3   $1  

Interest cost on projected benefit obligation

   8    1    8    2  

Expected return on plan assets

   (12  —      (11  —    

Amortization of prior service cost

   —      —      1    —    

Amortization of loss

   3    —      3    —    

Other

   1    —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $3   $2   $4   $3  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Nine Months Ended
September 30, 2011
  Nine Months Ended
September 30, 2010
 
   Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
  Qualified
pension
plans
  Other Post-
Retirement
Benefit
plans
 
   (in millions) 

Service cost

  $8   $1   $8   $1  

Interest cost on projected benefit obligation

   23    5    24    6  

Expected return on plan assets

   (34  (1  (33  (1

Amortization of prior service cost

   1    —      2    —    

Amortization of loss

   10    1    9    1  

Other

   2    —      1    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic costs

  $10   $6   $11   $7  
  

 

 

  

 

 

  

 

 

  

 

 

 

Components of net periodic costs for Duke Energy Indiana’s non-qualified pension plans were an insignificant amount for the three and sixnine months ended JuneSeptember 30, 2011 and 2010.

See Note 17 for additional information related to amounts reflected on Duke Energy Indiana’s Condensed Consolidated Balance Sheets associated with obligations related to qualified pension plans, non-qualified pension plans and other post-retirement benefit plans, which are allocated to Duke Energy Indiana by Duke Energy.

Employee Savings Plan

Duke Energy sponsors employee savings plans that cover substantially all U.S. employees. Duke Energy made pre-tax employer matching contributions of $19$18 million and $50$68 million during the three and sixnine months ended JuneSeptember 30, 2011, respectively. Duke Energy made pre-tax employer matching contributions of $18 million and $49$67 million during the three and sixnine months ended JuneSeptember 30, 2010, respectively.

The Subsidiary Registrants participate in Duke Energy sponsored employee savings plans. The following table shows the respective Subsidiary Registrants’ expense related to its proportionate share of pre-tax employer matching contributions.

PART I

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2011   2010   2011   2010 
   (in millions) 

Duke Energy Carolinas

  $8    $8    $20    $20  

Duke Energy Ohio

   1     1     2     3  

Duke Energy Indiana

   2     1     5     4  

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2011   2010   2011   2010 
   (in millions) 

Duke Energy Carolinas

  $8    $8    $28    $28  

Duke Energy Ohio

   1     —       3     3  

Duke Energy Indiana

   1     —       6     4  

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

15. Severance

Amounts included2011 Severance Plans. In conjunction with the proposed merger with Progress Energy, in the table below represent severance expense recorded by theAugust 2011, Duke Energy Registrants during 2010.announced plans to offer a voluntary severance plan to approximately 4,850 eligible employees. As this is a voluntary plan, all severance benefits offered under this plan are considered special termination benefits under GAAP. Special termination benefits are measured upon employee acceptance and recorded immediately absent a significant retention period. If a significant retention period exists, the cost of the special termination benefits are recorded ratably over the remaining service periods of the affected employees. The window for employees to request to voluntarily end their employment under this plan opened on November 7, 2011 and will close on November 30, 2011. Duke Energy Registrants recorded insignificant amounts foris unable to estimate the amount of severance expense during 2011.payments associated with this voluntary plan until the close of the window. Duke Energy reserves the right to reject any request to volunteer based on business needs and/or excessive participation. The voluntary severance plan is contingent upon the successful close of the proposed merger with Progress Energy.

   Three Months Ended
June 30, 2010
   Six Months Ended
June 30, 2010
 

Duke Energy

  $76    $144  

Duke Energy Carolinas

   44     85  

Duke Energy Ohio

   11     21  

Duke Energy Indiana

   16     26  

These amounts are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.2010 Severance Plans. During 2010, the majority of severance charges were related to a voluntary severance plan whereby eligible employees were provided a window during which to accept termination benefits. As this was a voluntary plan, all severance benefits offered under this plan were considered special termination benefits under GAAP. Special termination benefits are measured upon employee acceptance and recorded immediately absent a significant retention period. If a significant retention period exists, the cost of the special termination benefits are recorded ratably over the remaining service periods of the affected employees. Approximately 900 employees accepted the termination benefits during the voluntary window period, which closed March 31, 2010. Future severance costs under Duke Energy’s ongoing severance plan, if any, are currently not estimable.

Amounts included in the table below represent severance expense recorded by the Duke Energy Registrants during 2010. The Duke Energy Registrants recorded insignificant amounts for severance expense during 2011.

   Three  Months
Ended
September  30,

2010(a)
   Nine Months
Ended
September  30,

2010(a)
 

Duke Energy

  $20    $164  

Duke Energy Carolinas

   13     98  

Duke Energy Ohio

   2     23  

Duke Energy Indiana

   3     29  

(a)These amounts are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.

The severance costs discussed above for the Subsidiary Registrants include an allocation of their proportionate share of severance costs for employees of Duke Energy’s shared services affiliate that provides support to the Subsidiary Registrants. Amounts included in the table below represent the severance liability recorded by Duke Energy Carolinas and Duke Energy Indiana for employees of those registrants, and excludes costs allocated from and paid by Duke Energy’s shared services affiliate.

   Balance at
December 31, 2010
   Provision/
Adjustments
  Cash
Reductions
  Balance at
September 30, 2011
 
   (in millions) 

Duke Energy

  $87    $1   $(52 $36  

Duke Energy Carolinas

   21     (1  (18  2  

Duke Energy Indiana

   1     —      (1  —    

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

   Balance at
December 31, 2010
   Provision/
Adjustments
   Cash
Reductions
  Balance at
June 30, 2011
 
   (in millions) 

Duke Energy

  $87    $2    $(48 $41  

Duke Energy Carolinas

   21     —       (18  3  

Duke Energy Ohio

   —       1    —      1  

Duke Energy Indiana

   1     —       (1  —    

16. Income Taxes and Other Taxes

Income Taxes.Duke Energy and its subsidiaries file income tax returns in the U.S. with federal and various state governmental authorities, and in certain foreign jurisdictions. The taxable income of Duke Energy and its subsidiaries is reflected in Duke Energy’s U.S. federal and state income tax returns. These subsidiaries have a tax sharing agreement with Duke Energy where the separate return method is used to allocate tax expenses and benefits to the subsidiaries whose investments or results of operations provide these tax expenses and benefits. The accounting for income taxes essentially represents the income taxes that each of these subsidiaries would incur if it were a separate company filing its own tax return as a C-Corporation.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

The following table includes information regarding the Duke Energy Registrants unrecognized tax benefits.

 

June 30, 2011  Duke
Energy
   Duke
Energy
Carolinas
   Duke
Energy
Ohio
   Duke
Energy
Indiana
 
September 30, 2011  Duke
Energy
   Duke
Energy
Carolinas
   Duke
Energy
Ohio
   Duke
Energy
Indiana
 
  (in millions)   (in millions) 

Unrecognized tax benefits(a)

  $358    $238    $26    $19    $392    $262    $33    $22  

Amount that if recognized, would affect the effective tax rate or regulatory liability(b)

   121     113     —       —       121     113     —       —    

Amount that if recognized, would be recorded as a component of discontinued operations

   11     —       —       —       11     —       —       —    

December 31, 2010

                

Unrecognized tax benefits(a)

   342     217     29     21     342     217     29     21  

 

(a)The Duke Registrants do not anticipate a significant increase or decrease in unrecognized tax benefits in the next twelve months.
(b)Duke Energy and Duke Energy Carolinas are unable to estimate the specific amounts that would affect the effective tax rate or regulatory liability.

Duke Energy and its subsidiaries are no longer subject to U.S. federal examination for years before 2004. The years 2004 and 2005 are in Appeals. The Internal Revenue Service (IRS) is currently auditing the federal income tax returns for years 2006 and 2007. With few exceptions, Duke Energy and its subsidiaries are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2000.1999.

The effective tax rates for each of the Duke Energy Registrants are as follows:

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011 2010 2011 2010   2011 2010 2011 2010 

Duke Energy

   30.4  (114.2)%   30.8  60.1   30.7  31.2  30.8  41.9

Duke Energy Carolinas

   35.5  30.0  35.3  33.9   37.0  33.8  36.1  33.9

Duke Energy Ohio

   9.6  5.4  30.4  (4.3)%    47.3  32.6  36.9  (32.6)% 

Duke Energy Indiana

   29.3  36.1  32.3  34.9   37.2  32.2  30.8  33.8

As discussed in Note 7, in the second quarter of 2010, Duke Energy recorded a non-deductible goodwill impairment charge of $500 million and Duke Energy Ohio recorded non-deductible goodwill impairment charges of $677 million. In the firstthird quarter of 2011, federal true ups related to the 2010 tax return filing were recorded, which resulted in an increase in income tax expense for Duke Energy Carolinas, Duke Energy Ohio, and Duke Energy Indiana. Duke Energy Indiana has reflected an increase in AFUDC equity in 2011, as well as a $17 million write-off of deferred tax assets was recorded due to a changereduction in tax treatment of the Medicare Part D subsidypre-tax income due to the passing ofEdwardsport IGCC impairment in the health care reform legislation. Of this amount, $14 million was recorded by Duke Energy Carolinas. In the secondthird quarter of 2011, Duke Energy Ohio recorded a reduction of deferred tax liabilities as a result of the transfer of certain gas-fired generation assets to its wholly owned subsidiary Duke Energy Commercial Asset Management, LLC (DECAM).2011.

Excise Taxes. Certain excise taxes levied by state or local governments are collected by the Duke Energy Registrants from its customers. These taxes, which are required to be paid regardless of the Duke Energy Registrants’ ability to collect from the customer, are accounted for on a gross basis. When each of the Duke Energy Registrants act as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis. Excise taxes for each Duke Energy Registrant accounted for on a gross basis and recorded as revenues in the respective Condensed Consolidated Statements of Operations were as follows:

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2011   2010   2011   2010   2011   2010   2011   2010 
  (in millions)   (in millions)   (in millions)   (in millions) 

Duke Energy Carolinas

  $37    $38    $73    $76    $45    $47    $118    $123  

Duke Energy Ohio

   25     25     59     62     27     28     86     90  

Duke Energy Indiana

   7     7     15     14     9     8     24     22  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Duke Energy

  $69    $70    $147    $152    $81    $83    $228    $235  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

17. Related Party Transactions

Duke Energy Carolinas

Duke Energy Carolinas engages in related party transactions, which are generally performed at cost and in accordance with the applicable state and federal commission regulations. Balances due to or due from related parties included in the Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2011 and December 31, 2010 are as follows:

Assets/(Liabilities)

 

  June 30,
2011(a)
 December 31,
2010(a)
   September  30,
2011(a)
 December  31,
2010(a)
 
  (in millions)   (in millions) 

Current assets(b)

  $57   $293    $82   $293  

Non-current assets(c)

   110    104     110    104  

Current liabilities(d)

   (114  (195   (125  (195

Non-current liabilities(e)

   (42  (93   (65  (93

Net deferred tax liabilities(f)

   (4,244  (3,906   (4,442  (3,906

 

(a)Balances exclude assets or liabilities associated with accrued pension and other post-retirement benefits and with money pool arrangements as discussed below.
(b)Of the balances at JuneSeptember 30, 2011, $4$1 million is classified as Receivables and $53$81 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets. Of the balances at December 31, 2010, $90 million is classified as Receivables and $203 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.
(c)The balances at JuneSeptember 30, 2011 and December 31, 2010 are classified as Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(d)The balances at JuneSeptember 30, 2011, and December 31, 2010, are classified as Accounts payable on the Condensed Consolidated Balance Sheets.
(e)The balances at JuneSeptember 30, 2011 and December 31, 2010 are classified as Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.
(f)Of the balance at JuneSeptember 30, 2011, $(4,302)$(4,530) million is classified as Deferred income taxes and $58$88 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $(3,988) million is classified as Deferred income taxes and $82 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.

As discussed further in Note 14, Duke Energy Carolinas participates in Duke Energy’s qualified pension plan, non-qualified pension plan and other post-retirement benefit plans and is allocated its proportionate share of expenses associated with these plans. Additionally, Duke Energy Carolinas has been allocated accrued pension and other post-retirement benefit obligations of $252$247 million as of both Juneat September 30, 2011 and $252 million at December 31, 2010. This amount has been classified in the Consolidated Balance Sheets as follows:

 

  June 30,
2011
   December 31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Other current liabilities

  $10    $10    $10    $10  

Accrued pension and other post-retirement benefit costs

   242     242     237     242  

Other Related Party Amounts

 

  Three months ended Six months ended   Three months ended   Nine months ended 
  June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010   September 30, 2011 September 30, 2010   September 30, 2011 September 30, 2010 
  (in millions)   (in millions) 

Corporate governance and shared service expenses(a)

  $251   $234   $504   $468    $265   $276    $769   $744  

Indemnification coverages(b)

   5    6    10    12     5    7     15    19  

Rental income and other charged expenses, net(c)

   (2  (1  (4  2     (1  1     (5  3  

 

(a)Duke Energy Carolinas is charged its proportionate share of corporate governance and other costs by an unconsolidated affiliate that is a consolidated affiliate of Duke Energy. Corporate governance and other shared services costs are primarily related to human resources, employee benefits, legal and accounting fees, as well as other third party costs. These amounts are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(b)Duke Energy Carolinas incurs expenses related to certain indemnification coverages through Bison, Duke Energy’s wholly-owned captive insurance subsidiary. These expenses are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(c)Duke Energy Carolinas records income associated with the rental of office space to a consolidated affiliate of Duke Energy, as well as its proportionate share of certain charged expenses from affiliates of Duke Energy.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

As discussed further in Note 6, Duke Energy Carolinas participates in a money pool arrangement with Duke Energy and other Duke Energycertain of its subsidiaries. Interest income associated with money pool activity is recorded in Other Income and Expenses, net on the Condensed Consolidated Statements of Operations, was insignificant for each of the three and six months ended JuneSeptember 30, 2011 and 2010 and $1 million for each of the nine months ended September 30, 2011 and 2010. Interest expense associated with money pool activity is recorded in Interest Expense on the Condensed Consolidated Statements of Operations was insignificant for the three and six months ended JuneSeptember 30, 2011 and 2010 and $1 million for each of the nine months ended September 30, 2011 and 2010.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

In February 2010, Duke Energy Carolinas made a $200 million distribution to its parent, Duke Energy. In June 2010, Duke Energy Carolinas made a $150 million distribution to its parent, Duke Energy.

Duke Energy Ohio

Duke Energy Ohio engages in related party transactions, which are generally performed at cost and in accordance with the applicable state and federal commission regulations. Balances due to or due from related parties included in the Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2011 and December 31, 2010 are as follows:

Assets/(Liabilities)

   June 30,
2011(a)
  December 31,
2010(a)
 
   (in millions) 

Current assets(b)

  $24   $82  

Non-current assets(c)

   8    15  

Current liabilities(d)

   (22  (86

Non-current liabilities(e)

   (25  (42

Net deferred tax liabilities(f)

   (1,668  (1,579

   September  30,
2011(a)
  December  31,
2010(a)
 
   (in millions) 

Current assets(b)

  $84   $82  

Non-current assets(c)

   12    15  

Current liabilities(d)

   (60  (86

Non-current liabilities(e)

   —      (42

Net deferred tax liabilities(f)

   (1,739  (1,579

 

(a)Balances exclude assets or liabilities associated with accrued pension and other post-retirement benefits, Cinergy Receivables and money pool arrangements as discussed below.
(b)Of the balance at JuneSeptember 30, 2011, $13$17 million is classified as Receivables and $11$67 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $24 million is classified as Receivables and $58 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.
(c)The balances at JuneSeptember 30, 2011 and December 31, 2010 are classified as Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.
(d)Of the balance at JuneSeptember 30, 2011, ($58)54) million is classified as Accounts payable, $38($4) million is classified as Taxes accrued and ($2) million is classified as Other within Current Liabilities on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $(83) million is classified as Accounts payable and $(3) million is classified as Other within Current Liabilities on the Condensed Consolidated Balance Sheets.
(e)The balances at JuneSeptember 30, 2011 and December 31, 2010, are classified as Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.
(f)Of the balance at JuneSeptember 30, 2011, $(1,675)$(1,755) million is classified as Deferred income taxes, and $7$16 million is classified as Other within Current Assets, on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $(1,588) million is classified as Deferred income taxes, and $9 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.

As discussed further in Note 14, Duke Energy Ohio participates in Duke Energy’s qualified pension plan, non-qualified pension plan and other post-retirement benefit plans and is allocated its proportionate share of expenses associated with these plans. Additionally, Duke Energy Ohio has been allocated accrued pension and other post-retirement benefit obligations of $213$192 million at JuneSeptember 30, 2011 and $211 million at December 31, 2010. These amounts have been classified in the Condensed Consolidated Balance Sheets as follows:

 

  June  30,
2011
   December  31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Other current liabilities

  $4    $4    $4    $4  

Accrued pension and other post-retirement benefit costs

   209     207     188     207  

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

Other Related Party Amounts

 

  Three months ended   Six months ended   Three months ended   Nine months ended 
  June 30, 2011 June 30, 2010   June 30, 2011 June 30, 2010   September 30, 2011 September 30, 2010   September 30, 2011 September 30, 2010 
  (in millions)   (in millions) 

Corporate governance and shared service expenses(a)

  $91   $55    $186   $158    $104   $99    $290   $257  

Indemnification coverages(b)

   4    4     8    9     5    5     13    14  

Rental income and other charged expenses, net(c)

   —  (e)   1     —  (e)   2     —  (e)   3     —  (e)   5  

Cinergy receivables interest income(d)

   3    3     7    8     3    4     10    12  

 

(a)Duke Energy Ohio is charged its proportionate share of corporate governance and other costs by an unconsolidated affiliate that is a consolidated affiliate of Duke Energy. Corporate governance and other shared services costs are primarily related to human resources, employee benefits, legal and accounting fees, as well as other third party costs. These amounts are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(b)Duke Energy Ohio incurs expenses related to certain indemnification coverages through Bison, Duke Energy’s wholly-owned captive insurance subsidiary. These expenses are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(c)Duke Energy Ohio records income associated with the rental of office space to a consolidated affiliate of Duke Energy, as well as its proportionate share of certain charged expenses from affiliates of Duke Energy.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

(d)As discussed in Note 11, certain trade receivables have been sold by Duke Energy Ohio to Cinergy Receivables, a consolidated entity formed by Cinergy. The proceeds obtained from the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the purchase price. The interest income associated with the subordinated note is recorded in Other Income and Expenses, net on the Condensed Consolidated Statements of Operations.
(e)For the three and six months ended JuneSeptember 30, 2011, net rental income was insignificant.

As discussed further in Note 6, Duke Energy Ohio participates in a money pool arrangement with Duke Energy and other Duke Energycertain of its subsidiaries. Interest income associated with money pool activity is recorded in Other Income and Expenses, net on the Condensed Consolidated Statements of Operations was insignificant for each of the three and six months ended JuneSeptember 30, 2011 and 2010 and $1 million for each of the nine months ended September 30, 2011 and 2010. Interest expense associated with money pool activity is recorded in Interest Expense on the Condensed Consolidated Statements of Operations was insignificant for each of the three and sixnine months ended JuneSeptember 30, 2011 and 2010.

Duke Energy Ohio enters into certain derivative positions on behalf of Duke Energy Retail, a consolidated affiliate of Duke Energy. These contracts are undesignated, thus the mark-to-market impacts of these contracts are reflected in Duke Energy Ohio’s Condensed Consolidated Statements of Operations. See Note 8 for additional information.

DECAM conducts hedging activities for certain of Duke Energy’s non-regulated entities. DECAM meets its funding needs through an intercompany loan agreement from Duke Energy Ohio’s parent entity, Cinergy. The intercompany loan was executed in February 2011. DECAM had no outstanding intercompany loan balance with Cinergy as of JuneSeptember 30, 2011.

In May 2011, Duke Energy Vermillion, an indirect wholly-owned subsidiary of Duke Energy Ohio, entered into an agreement to sell its 75% undivided ownership interest in the Vermillion Generating Station to Duke Energy Indiana and WVPA. Refer to Note 3 and Note 4 for further discussion.

In September 2011 and March 2011, Duke Energy Ohio paid adividends of $200 million and $285 million, dividendrespectively, to its parent, Cinergy.

Duke Energy Indiana

Duke Energy Indiana engages in related party transactions, which are generally performed at cost and in accordance with the applicable state and federal commission regulations. Balances due to or due from related parties included in the Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2011 and December 31, 2010 are as follows:

Assets/(Liabilities)

   June 30,
2011(a)
  December 31,
2010(a)
 
   (in millions) 

Current assets(b)

  $47   $51  

Current liabilities(c)

   (57  (69

Non-current liabilities(d)

   (19  (20

Net deferred tax liabilities(e)

   (970  (932

   September  30,
2011(a)
  December  31,
2010(a)
 
   (in millions) 

Current assets(b)

  $27   $51  

Current liabilities(c)

   (127  (69

Non-current liabilities(d)

   (22  (20

Net deferred tax liabilities(e)

   (872  (932

 

(a)Balances exclude assets or liabilities associated with accrued pension and other post-retirement benefits, Cinergy Receivables and money pool arrangements as discussed below.
(b)Of the balance at JuneSeptember 30, 2011, $34$23 million is classified as Receivables and $13$4 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $27 million is classified as Receivables and $24 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.
(c)Of the balance at JuneSeptember 30, 2011, $(55)$(54) million is classified as Accounts payable and $(2)$(73) million is classified as Taxes accrued on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $(67) million is classified as Accounts payable and $(2) million is classified as Taxes accrued on the Condensed Consolidated Balance Sheets.
(d)The balances at JuneSeptember 30, 2011 and December 31, 2010 are classified as Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.
(e)Of the balance at JuneSeptember 30, 2011, $(1,009)$(881) million is classified as Deferred income taxes and $39$9 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets. Of the balance at December 31, 2010, $(973) million is classified as Deferred income taxes and $41 million is classified as Other within Current Assets on the Condensed Consolidated Balance Sheets.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

As discussed further in Note 14, Duke Energy Indiana participates in Duke Energy’s qualified pension plan, non-qualified pension plan and other post-retirement benefit plans and is allocated its proportionate share of expenses associated with these plans. Additionally, Duke Energy Indiana has been allocated accrued pension and other post-retirement benefit obligations of $267$263 million at JuneSeptember 30, 2011 and $272 million at December 31, 2010. These amounts have been classified in the Condensed Consolidated Balance Sheets as follows:

 

  June  30,
2011
   December  31,
2010
   September 30,
2011
   December 31,
2010
 
  (in millions)   (in millions) 

Other current liabilities

  $2    $2    $2    $2  

Accrued pension and other post-retirement benefit costs

   265     270     261     270  

Other Related Party Amounts

 

   Three months ended   Six months ended 
   June 30, 2011   June 30, 2010   June 30, 2011   June 30, 2010 
   (in millions) 

Corporate governance and shared service expenses(a)

  $99    $92    $206    $176  

Indemnification coverages(b)

   2     2     4     4  

Rental income and other charged expenses, net(c)

   2     3     3     4  

Cinergy receivables interest income(d)

   3     3     7     6  

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

   Three months ended   Nine months ended 
   September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010 
   (in millions) 

Corporate governance and shared service expenses(a)

  $100    $90    $306    $266  

Indemnification coverages(b)

   1     2     5     6  

Rental income and other charged expenses, net(c)

   1     2     4     6  

Cinergy receivables interest income(d)

   3     4     10     10  

 

(a)Duke Energy Indiana is charged its proportionate share of corporate governance and other costs by an unconsolidated affiliate that is a consolidated affiliate of Duke Energy. Corporate governance and other shared services costs are primarily related to human resources, employee benefits, legal and accounting fees, as well as other third party costs. These amounts are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(b)Duke Energy Indiana incurs expenses related to certain indemnification coverages through Bison, Duke Energy’s wholly-owned captive insurance subsidiary. These expenses are recorded in Operation, Maintenance and Other within Operating Expenses on the Condensed Consolidated Statements of Operations.
(c)Duke Energy Indiana records income associated with the rental of office space to a consolidated affiliate of Duke Energy, as well as its proportionate share of certain charged expenses from affiliates of Duke Energy.
(d)As discussed in Note 11, certain trade receivables have been sold by Duke Energy Indiana to Cinergy Receivables, a consolidated entity formed by Cinergy. The proceeds obtained from the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the purchase price. The interest income associated with the subordinated note is recorded in Other Income and Expenses, net on the Condensed Consolidated Statements of Operations.

As discussed further in Note 6, Duke Energy Indiana participates in a money pool arrangement with Duke Energy and other Duke Energycertain of its subsidiaries. Interest income associated with money pool activity is recorded in Other Income and Expenses, net on the Condensed Consolidated Statements of Operations and was insignificant for each of the three and sixnine months ended JuneSeptember 30, 2011 and 2010. Interest expense associated with money pool activity is recorded in Interest Expense on the Condensed Consolidated Statements of Operations. For each of the three and sixnine months ended JuneSeptember 30, 2011 and 2010 interest expense was insignificant.

In May 2011, Duke Energy Vermillion, an indirect wholly-owned subsidiary of Duke Energy Ohio, entered into an agreement to sell its 75% undivided ownership interest in the Vermillion Generating Station to Duke Energy Indiana and WVPA. Refer to Note 3 and Note 4 for further discussion.

In February 2010, Duke Energy Indiana received a $225 million capital contribution from its parent, Cinergy. In June 2010, Duke Energy Indiana received a $125 million capital contribution from its parent, Cinergy.

18. New Accounting Standards

The following new accounting standards were adopted by the Duke Energy Registrants subsequent to JuneSeptember 30, 2010 and the impact of such adoption, if applicable, has been presented in the respective Condensed Consolidated Financial Statements of the Duke Energy Registrants:

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605—Revenue Recognition (ASC 605). In October 2009, the FASB issued new revenue recognition accounting guidance in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables. This new accounting guidance primarily applies to all contractual arrangements in which a vendor will perform multiple revenue generating activities and addresses the unit of accounting for arrangements involving multiple deliverables, as well as how arrangement consideration should be allocated to the separate units of accounting. For the Duke Energy Registrants, the new accounting guidance was effective January 1, 2011 and applied on a prospective basis. This new accounting guidance did not have a material impact to the consolidated results of operations, cash flows or financial position of the Duke Energy Registrants.

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

ASC 805—Business Combinations (ASC805). In November 2010, the FASB issued new accounting guidance in response to diversity in the interpretation of pro forma information disclosure requirements for business combinations. The new accounting guidance requires an entity to present pro forma financial information as if a business combination occurred at the beginning of the earliest period presented as well as additional disclosures describing the nature and amount of material, nonrecurring pro forma adjustments. This new accounting guidance was effective January 1, 2011 and will be applied to all business combinations consummated after that date.

ASC 820—Fair Value Measurements and Disclosures (ASC 820).In January 2010, the FASB amended existing fair value measurements and disclosures accounting guidance to clarify certain existing disclosure requirements and to require a number of additional disclosures, including amounts and reasons for significant transfers between the three levels of the fair value hierarchy, and presentation of certain information in the reconciliation of recurring Level 3 measurements on a gross basis. For the Duke Energy Registrants, certain portions of this revised accounting guidance were effective on January 1, 2010, with additional disclosures effective for periods beginning January 1, 2011. The adoption of this accounting guidance resulted in additional disclosure in the notes to the consolidated financial statements but did not have an impact on the Duke Energy Registrants’ consolidated results of operations, cash flows or financial position. See note 9 for additional disclosures required by the revised accounting guidance in ASC 820.

ASC 350–Intangibles–Goodwill and Other.In September 2011, the FASB amended existing goodwill impairment testing accounting guidance to provide an entity testing goodwill for impairment with the option of performing a qualitative assessment prior to calculating the fair value of a reporting unit in step one of a goodwill impairment test. Under this revised guidance, a qualitative assessment would require an evaluation of economic, industry, and company-specific considerations. If an entity determines, on a basis of such qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying value of a reporting unit, the two-step impairment test, as currently required under existing applicable accounting guidance, would be required. Otherwise, no further impairment testing would be required. The revised goodwill impairment testing accounting guidance is effective for the Duke Energy Registrants’ annual and interim goodwill impairment tests performed for fiscal years beginning January 1, 2012, with early adoption of this revised guidance permitted for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. Since annual goodwill impairment tests are performed by Duke Energy as of August 31, the Duke Energy Registrants early adopted this revised accounting guidance during the third quarter of 2011 and applied that guidance to their annual goodwill impairment tests for 2011.

The following new Accounting Standards Updates (ASU) have been issued, but have not yet been adopted by Duke Energy, as of JuneSeptember 30, 2011:

ASC 820—Fair Value Measurements and Disclosures (ASC 820).In May 2011, the FASB amended existing requirements for measuring fair value and for disclosing information about fair value measurements. This revised guidance results in a consistent definition of fair value, as well as common requirements for measurement and disclosure of fair value information between U.S. GAAP and International Financial Reporting Standards (IFRS). In addition, the amendments set forth enhanced disclosure requirements with respect to recurring Level 3 measurements, nonfinancial assets measured or disclosed at fair value, transfers between levels in the fair value hierarchy, and assets and liabilities disclosed but not recorded at fair value. For the Duke Energy Registrants, the revised fair value measurement guidance is effective on a prospective basis for interim and annual periods beginning January 1, 2012. Duke Energy is currently evaluating the potential impact of the adoption of this revised guidance and is unable to estimate at this time the impact of adoption on its consolidated results of operations, cash flows, or financial position.

ASC 220—Comprehensive Income (ASC 220).In June 2011, the FASB amended the existing requirements for presenting comprehensive income in financial statements primarily to increase the prominence of items reported in other comprehensive income (OCI) and to facilitate the convergence of U.S. GAAP and IFRS. Specifically, the revised guidance eliminates the option currently provided under existing requirements to present components of OCI as part of the statement of changes in stockholders’ equity. Accordingly, all non-owner changes in stockholders’ equity will be required to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. For the Duke Energy Registrants, this revised guidance is effective on a retrospective basis for interim and annual periods beginning January 1, 2012. Early adoption of this revised guidance is permitted. Duke Energy is currently evaluating the revised requirements for presenting comprehensive income in its financial statements and is unable to estimate at this time the impact of adoption of this revised guidance on its consolidated results of operations, cash flows or financial position.

PART I

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—(Continued)

19. Comprehensive Income and Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) for the Duke Energy Registrants includes net income and all other non-owner changes in equity. The tables below provide the components of other comprehensive income (loss) and total comprehensive income (loss) for the three months ended JuneSeptember 30, 2011 and 2010. Components of other comprehensive income (loss) and total comprehensive income (loss) for the sixnine months ended JuneSeptember 30, 2011 and 2010 are presented in the respective Condensed Consolidated Statements of Equity and Comprehensive Income.

Duke Energy

 

  Common
Stockholders’
Equity
 Noncontrolling
Interests
   Total
Equity
   Common
Stockholders’
Equity
 Noncontrolling
Interests
 Total
Equity
 
  (in millions)   (in millions) 

Three Months Ended June 30, 2011

     

Three Months Ended September 30, 2011

  

Net Income

  $435   $6    $441    $472   $(2 $470  
  

 

  

 

   

 

   

 

  

 

  

 

 

Other comprehensive income

         

Foreign currency translation adjustments

   62    3     65     (235  (11  (246

Pension and OPEB related adjustments to AOCI(a)

   2    —       2     1    —      1  

Net unrealized loss on cash flow hedges(b)

   (7  —       (7   (47  —      (47

Reclassification into earnings from cash flow hedges(c)

   1    —       1     1    —      1  

Unrealized gain on investments in auction rate securities(d)

   1    —       1     3    —      3  
  

 

  

 

   

 

   

 

  

 

  

 

 

Other comprehensive income, net of tax

   59    3     62     (277  (11  (288
  

 

  

 

   

 

   

 

  

 

  

 

 

Total Comprehensive Income

  $494   $9    $503    $195   $(13 $182  
  

 

  

 

   

 

   

 

  

 

  

 

 

PART I

DUKE ENERGY CORPORATION - DUKE ENERGY CAROLINAS, LLC - DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements – (Continued)

 

(a)Net of insignificant tax expense.
(b)Net of $3 million tax benefit.
(c)Net of $1 million tax expense.
(d)Net of $2 million tax benefit.

   Common
Stockholders’
Equity
  Noncontrolling
Interests
  Total
Equity
 
   (in millions) 

Three Months Ended June 30, 2010

    

Net (Loss) Income

  $(222 $5   $(217
  

 

 

  

 

 

  

 

 

 

Other comprehensive loss

    

Foreign currency translation adjustments

   (12  (1  (13

Pension and OPEB related adjustments to AOCI(a)

   2    —      2  

Net unrealized loss on cash flow hedges(b)

   (10  —      (10

Reclassification into earnings from cash flow hedges(c)

   1    —      1  

Unrealized gain on investments in auction rate securities(d)

   3    —      3  
  

 

 

  

 

 

  

 

 

 

Other comprehensive loss, net of tax

   (16  (1  (17
  

 

 

  

 

 

  

 

 

 

Total Comprehensive (Loss) Income

  $(238 $4   $(234
  

 

 

  

 

 

  

 

 

 

(a)Net of $1 million tax expense.
(b)Net of $3$26 million tax benefit.
(c)Net of insignificant tax benefit.expense.
(d)Net of $2$5 million tax expense.

   Common
Stockholders’
Equity
   Noncontrolling
Interests
  Total
Equity
 
   (in millions) 

Three Months Ended September 30, 2010

     

Net Income (Loss)

  $670    $(4 $666  
  

 

 

   

 

 

  

 

 

 

Other comprehensive income

     

Foreign currency translation adjustments

   88     4    92  

Pension and OPEB related adjustments to AOCI(a)

   4     —      4  

Net unrealized gain on cash flow hedges(b)

   1     —      1  

Unrealized gain on investments in auction rate securities(c)

   2     —      2  
  

 

 

   

 

 

  

 

 

 

Other comprehensive income, net of tax

   95     4    99  
  

 

 

   

 

 

  

 

 

 

Total Comprehensive Income

  $765    $—     $765  
  

 

 

   

 

 

  

 

 

 

(a)Net of $5 million tax expense.
(b)Net of insignificant tax expense.
(c)Net of insignificant tax expense.

Duke Energy Carolinas

   Three Months Ended
September 30,
 
   2011   2010 
   (in millions) 

Net Income

  $311    $315  
  

 

 

   

 

 

 

Other comprehensive income

    

Reclassification into earnings from cash flow hedges(a)

   2     1  

Unrealized gain on investments in auction rate securities(b)

   —       1  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   2     2  
  

 

 

   

 

 

 

Total Comprehensive Income

  $313    $317  
  

 

 

   

 

 

 

(a)Net of $1 million tax benefit for the three months ended September 30, 2011 and insignificant tax expense for the three months ended September 30, 2010.
(b)Net of insignificant tax expense for the three months ended September 30, 2011 and insignificant tax expense for the three months ended September 30, 2010.

PART I

DUKE ENERGY CORPORATION

- DUKE ENERGY CAROLINAS, LLC

- DUKE ENERGY OHIO, INC. -

DUKE ENERGY INDIANA, INC.

Combined Notes To Unaudited Condensed Consolidated Financial Statements—Statements – (Continued)

 

Duke Energy CarolinasOhio

 

   Three Months  Ended
June 30,
 
   2011   2010 
   (in millions) 

Net Income

  $193    $202  
  

 

 

   

 

 

 

Other comprehensive income

    

Reclassification into earnings from cash flow hedges(a)

   1     1  

Unrealized gain on investments in auction rate securities(a)

   —       1  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   1     2  
  

 

 

   

 

 

 

Total Comprehensive Income

  $194    $204  
  

 

 

   

 

 

 
   Three Months Ended
September 30,
 
   2011  2010 
   (in millions) 

Net Income

  $51   $176  
  

 

 

  

 

 

 

Other comprehensive loss

   

Pension and OPEB related adjustments to AOCI(a)

   (1 

Reclassification into earnings from cash flow hedges(b)

   —      (1
  

 

 

  

 

 

 

Other comprehensive loss, net of tax

   (1  (1
  

 

 

  

 

 

 

Total Comprehensive Income

  $50   $175  
  

 

 

  

 

 

 

 

(a)Net of $2$1 million tax expensebenefit for the three months ended JuneSeptember 30, 2011 and $1 million2011.
(b)Net of insignificant tax expensebenefit for the three months ended JuneSeptember 30, 2010.

Duke Energy OhioIndiana

 

   Three Months  Ended
June 30,
 
   2011   2010 
   (in millions) 

Net Income (Loss)

  $33    $(759
  

 

 

   

 

 

 

Other comprehensive

    

Pension and OPEB related adjustments to AOCI(a)

   1     2  
  

 

 

   

 

 

 

Other comprehensive, net of tax

   1     2  
  

 

 

   

 

 

 

Total Comprehensive Income (Loss)

  $34    $(757
  

 

 

   

 

 

 
   Three Months Ended
September 30,
 
   2011  2010 
   (in millions) 

Net (Loss) Income

  $(31 $92  
  

 

 

  

 

 

 

Other comprehensive loss

   

Reclassification into earnings from cash flow hedges(a)

   (1  (1
  

 

 

  

 

 

 

Other comprehensive loss, net of tax

   (1  (1
  

 

 

  

 

 

 

Total Comprehensive Income

  $(32 $91  
  

 

 

  

 

 

 

 

(a)Net of insignificant$1 million tax expensebenefit for the three months ended JuneSeptember 30, 2011 and $1 million tax expense for the three months ended JuneSeptember 30, 2010.

Duke Energy Indiana

   Three Months  Ended
June 30,
 
   2011   2010 
   (in millions) 

Net Income

  $68    $57  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   —       —    
  

 

 

   

 

 

 

Total Comprehensive Income

  $68    $57  
  

 

 

   

 

 

 

20. Subsequent Events

For information on subsequent events related to acquisitions and sales of other assets, regulatory matters, commitments and contingencies, debt and intangibles,credit facilities, fair value of financial asset and liabilities, variable interest entities and severance, see Notes 3, 4, 5, 6, 9, 11, and 715, respectively.

PART I

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

Proposed Merger with Progress Energy, Inc. (Progress Energy)

On January 8, 2011, Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) entered into an Agreement and Plan of Merger (Merger Agreement) among Diamond Acquisition Corporation, a North Carolina corporation and Duke Energy’s wholly-owned subsidiary (Merger Sub) and Progress Energy, Inc (Progress Energy), a North Carolina corporation. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Progress Energy with Progress Energy continuing as the surviving corporation and a wholly-owned subsidiary of Duke Energy.

Pursuant to the Merger Agreement, upon the closing of the merger, each issued and outstanding share of Progress Energy common stock will automatically be cancelled and converted into the right to receive 2.6125 shares of common stock of Duke Energy, subject to appropriate adjustment for a reverse stock split of the Duke Energy common stock as contemplated in the Merger Agreement and except that any shares of Progress Energy common stock that are owned by Progress Energy or Duke Energy, other than in a fiduciary capacity, will be cancelled without any consideration therefor. Each outstanding option to acquire, and each outstanding equity award relating to, one share of Progress Energy common stock will be converted into an option to acquire, or an equity award relating to 2.6125 shares of Duke Energy Common stock, as applicable, subject to appropriate adjustment for the reverse stock split. Based on Progress Energy shares outstanding at JuneSeptember 30, 2011, Duke Energy would issue 770771 million shares of common stock to convert the Progress Energy common shares in the merger under the unadjusted exchange ratio of 2.6125. The exchange ratio will be adjusted proportionately to reflect a 1-for-3 reverse stock split with respect to the issued and outstanding Duke Energy common stock that Duke Energy plans to implement prior to, and conditioned on, the completion of the merger. The resulting adjusted exchange ratio is 0.87083 of a share of Duke Energy common stock for each share of Progress Energy common stock. Based on Progress Energy shares outstanding at JuneSeptember 30, 2011, Duke Energy would issue 257 million shares of common stock, after the effect of the 1-for-3 reverse stock split, to convert the Progress Energy common shares in the merger. The merger will be accounted for under the acquisition method of accounting with Duke Energy treated as the acquirer, for accounting purposes. Based on the market price of Duke Energy common stock on JuneSeptember 30, 2011, the transaction would be valued at $14.5$15.4 billion and would result in incremental recorded goodwill to Duke Energy of $8.3$9.3 billion, according to current estimates. Duke Energy would also assume all of Progress Energy’s outstanding debt, which is estimated to be $13.8$15.1 billion based on the approximate fair value of Progress Energy’s outstanding indebtedness at JuneSeptember 30, 2011. The Merger Agreement has been unanimously approved by both companies’ Boards of Directors.

The merger is conditioned upon, among other things, approval by the shareholders of both companies, as well as expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and approval by the Federal Energy Regulatory Commission (FERC),FERC, the Federal Communications Commission (FCC), the Nuclear Regulatory Commission (NRC),NRC, the North Carolina Utilities Commission (NCUC),NCUC, and the Kentucky Public Service Commission (KPSC). In connection with the merger,KPSC. Duke Energy and Progress Energy also are also seeking review of the merger by the PSCSC and approval of the Public Service Commission of South Carolina (PSCSC) forjoint dispatch agreement by the future merger of their Carolinas utility companies, Duke Energy Carolinas, LLC (Duke Energy Carolinas) and Progress Energy Carolinas, Inc (Progress Energy Carolinas).PSCSC. Although there are no merger-specific regulatory approvals required in Indiana, Ohio or Florida, the companies will continue to update the public services commissions in those states on the merger, as applicable and as required. The status of these matters is as follows:

 

On March 17, 2011, Duke Energy filed an initial registration statement on Form S-4 with the Securities and Exchange Commission (SEC) for shares to be issued to consummate the merger with Progress Energy. On July 7, 2011, the Form S-4 was declared effective by the SEC, and the joint proxy statement/prospectus contained in the Form S-4 was mailed to the shareholders of both companies thereafter. Meetings forOn August 23, 2011, Duke Energy and Progress Energy shareholders to vote onapproved the Merger are scheduled for August 23, 2011.proposed merger. In addition, Duke Energy shareholders approved a 1-for-3 reverse stock split.

 

On March 28, 2011, Duke Energy and Progress Energy submitted Hart-Scott-Rodino antitrust filings to the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). The parties have met their obligations under the Hart-Scott-Rodino Act, which is no longer a bar to closing the transaction.

 

On March 30, 2011, Progress Energy made filings with the NRC for approval for indirect transfer of control of licenses for Progress Energy’s nuclear facilities to include Duke Energy as the ultimate parent corporation on these licenses.

 

On April 4, 2011, Duke Energy and Progress Energy filed a merger application and joint dispatch agreement with the NCUC. On September 2, 2011, Duke Energy, Progress Energy and the NC Public Staff filed a settlement agreement with the NCUC. Under the settlement agreement, the companies will guarantee North Carolina customers their allocable share of $650 million in savings related to fuel and joint dispatch of generation assets over the first five years after the merger closes, continue community financial support for a minimum of four years, contribute to weatherization efforts of low-income customers and workforce development and agree not to recover direct merger-related costs. A public hearing has been scheduled to begin onoccurred September 20,20-22, 2011 and proposed orders and/or briefs must be filed by November 14, 2011.

 

On April 4, 2011, Duke Energy and Progress Energy filed a merger application with the KPSC. On June 24, 2011, Duke Energy and Progress Energy filed a settlement agreement with the Attorney General. A public hearing occurred on July 8, 2011. An order conditionally approving the settlement agreementmerger was issued on August 2, 2011. The KPSC requiresrequired Duke Energy and Progress Energy to accept all the conditions contained in the order within seven days.days of the order. After seeking an extension, on August 19, 2011, Duke Energy and Progress Energy filed for clarification of one of the merger conditions. On September 15, 2011, Duke Energy and Progress Energy filed for approval of a stipulation revising the merger condition. On October 28, 2011, the KPSC issued an order approving the stipulation and merger.

 

On April 4, 2011, Duke Energy and Progress Energy, madejointly filed applications with the FERC for the approval of the merger, the Joint Dispatch Agreement and the joint filingsOpen Access Transmission Tariff (OATT). On September 30, 2011, the FERC conditionally approved the merger, subject to approval of mitigation measures to address its finding that the combined company could have an adverse effect on competition in wholesale power markets in the Duke Energy Carolinas and Progress Energy Carolinas East balancing authority areas. On October 17, 2011 Duke Energy and Progress Energy filed their plan for mitigating the FERC’s concerns by proposing to offer on a daily basis a certain quantity of power during summer and winter periods to the extent it is available after serving native load and existing firm obligations. The price will be incremental cost, plus 10 percent. Intervenors may comment on the plan by November 16, after which time, the FERC will rule on whether the mitigation plan adequately addresses the market power issues. FERC has not yet ruled on the Joint Dispatch Agreement or the joint OATT. On October 31, 2011, Duke Energy and Progress Energy filed a request for rehearing with the FERC. The request states that the FERC is expectedapplied a more stringent analysis to rule on the proposed merger application within 180 days.than required by its current rules. Duke Energy and Progress Energy also requested that the FERC address the companies’ previously filed mitigation plan no later than December 15, 2011.

 

On April 25, 2011, Duke Energy and Progress Energy, on behalf of their utility companies Duke Energy Carolinas and Progress Energy Carolinas, filed an application requesting the PSCSC to review the merger and approve the proposed Joint Dispatch Agreement and the prospective future merger of Duke Energy Carolinas and Progress Energy Carolinas. The PSCSC has not yet scheduled a public hearing.On September 13, 2011, Duke Energy and Progress Energy withdrew their application seeking approval for the future merger of

PART I

their Carolinas utility companies, Duke Energy Carolinas and Progress Energy Carolinas, as the merger of these entities is not likely to occur for several years after the close of the merger. On October 13, 2011 the PSCSC issued an order suspending all scheduled deadlines and the hearing date until Duke Energy and Progress Energy file their proposed mitigation measures with the FERC and the PSCSC. Duke Energy and Progress Energy made that filing on October 17, 2011. On November 2, 2011, the PSCSC adopted a revised procedural schedule for its review of the merger. Hearings are scheduled to begin the week of December 12, 2011. The docket will remain open pending FERC issuance of its final orders on the merger related actions before the FERC.

 

On July 12, 2011, Duke Energy and Progress Energy filed an application with the FCC for approval of radio system license transfers. The FCC approved the transfers on July 27, 2011.

Duke Energy is targeting completion of the merger by the end of 2011, however no assurances can be given as to the timing of the satisfaction of all closing conditions or that all required approvals will be received.

The Merger Agreement contains certain termination rights for both Duke Energy and Progress Energy, and further provides for the payment of a termination fee of $400 million by Progress Energy under specified circumstances and a termination fee of $675 million by Duke Energy under specified circumstances.

For the three and sixnine months ended JuneSeptember 30, 2011, Duke Energy incurred transaction and integration costs related to the Progress Energy merger of $5$13 million and $16$29 million, respectively, which are recorded within Operating Expenses in Duke Energy’s Condensed Consolidated Statement of Operations.

PART I

Duke Energy Corporation

Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) is an energy company primarily located in the Americas. Duke Energy operates in the United States (U.S.) primarily through its wholly-owned subsidiaries, Duke Energy Carolinas, LLC (Duke Energy Carolinas), Duke Energy Ohio, Inc. (Duke Energy Ohio), which includes Duke Energy Kentucky, Inc. (Duke Energy Kentucky), and Duke Energy Indiana, Inc. (Duke Energy Indiana), as well as in South America and Central America through International Energy.

When discussing Duke Energy’s consolidated financial information, it necessarily includes the results of its three separate subsidiary registrants, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana (collectively referred to as the Subsidiary Registrants), which, along with Duke Energy, are collectively referred to as the Duke Energy Registrants. The following combined Management’s Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana. However, none of the registrants makes any representation as to information related solely to Duke Energy or the Subsidiary Registrants of Duke Energy other than itself.

Management’s Discussion and Analysis should be read in conjunction with the respective Unaudited Condensed Consolidated Financial Statements.

Duke Energy

EXECUTIVE OVERVIEW

Net income (loss) attributable to Duke Energy was income of $435$472 million for the three months ended JuneSeptember 30, 2011, as compared to a loss of $222$670 million for the three months ended JuneSeptember 30, 2010. Diluted earnings per share decreased from $0.51 per share for the three months ended September 30, 2010, to $0.35 per share for the three months ended September 30, 2011 primarily due to the decrease in net income in the third quarter of 2011 as compared to the same period in 2010, as a result of a larger impairment related to the Edwardsport integrated gasification combined cycle (IGCC) plant in 2011 than in 2010, along with other factors described further below. Income from continuing operations was $469 million for the three months ended September 30, 2011 as compared to $666 million for the same period in 2010. Total reportable segment EBIT (defined below in “Segment Results” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations) was $956 million for the three months ended September 30, 2011, as compared to $1,244 million for the same period in 2010.

Net income attributable to Duke Energy Corporation was $1,418 million for the nine months ended September 30, 2011, as compared to $893 million for the same period in 2010. Diluted earnings per share increased from a loss of $0.17$0.68 per share for the threenine months ended JuneSeptember 30, 2010, to income of $0.33$1.06 per share for the threenine months ended JuneSeptember 30, 2011, primarily due to the increase in net income in the threenine months ended JuneSeptember 30, 2011, as compared to the same period in 2010, primarily as a result of a 2010 impairment of goodwill and certain generation assets associated with non-regulated generation operations in the Midwest, partially offset by a 2011 impairment related to the Edwardsport IGCC plant, and other factors described further below. Income (loss) from continuing operations was income of $441$1,423 million for the threenine months ended JuneSeptember 30, 2011, as compared to a loss of $218$893 million for the same period in 2010. Total reportable segment EBIT (defined below in “Segment Results” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations) was $857$2,796 million for the threenine months ended JuneSeptember 30, 2011, as compared to $193 million for the same period in 2010.

Net income attributable to Duke Energy Corporation was $946 million for the six months ended June 30, 2011 as compared to $223 million for the same period in 2010. Diluted earnings per share increased from $0.17 per share for the six months ended June 30, 2010 to $0.71 per share for the six months ended June 30, 2011 due to the increase in net income in the six months ended June 30, 2011 as compared to the same period in 2010, primarily as a result of a 2010 impairment of goodwill and certain generation assets associated with non-regulated generation operations in the Midwest, partially offset by other factors described further below. Income from continuing operations was $954 million for the six months ended June 30, 2011 as compared to $227 million for the same period in 2010. Total reportable segment EBIT (defined below in “Segment Results” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations) was $1,840 million for the six months ended June 30, 2011 as compared to $1,206$2,450 million for the same period in 2010.

See “Results of Operations” below for a detailed discussion of the consolidated results of operations, as well as a detailed discussion of EBIT results for each of Duke Energy’s reportable business segments, as well as Other.

RESULTS OF OPERATIONS

Results of Operations and Variances

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
 
   2011   2010  Increase
(Decrease)
  2011   2010   Increase
(Decrease)
 
   (in millions) 

Operating revenues

  $3,534    $3,287   $247   $7,197    $6,881    $316  

Operating expenses

   2,859     3,306    (447  5,718     6,141     (423

Gains on sales of other assets and other, net

   4     5    (1  14     7     7  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Operating income (loss)

   679     (14  693    1,493     747     746  

Other income and expenses, net

   157     124    33    308     244     64  

Interest expense

   203     212    (9  422     422     —    
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   633     (102  735    1,379     569     810  

Income tax expense from continuing operations

   192     116    76    425     342     83  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

   441     (218  659    954     227     727  

Income from discontinued operations, net of tax

   —       1    (1  —       1     (1)
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Net income (loss)

   441     (217  658    954     228     726  

Less: Net income attributable to noncontrolling interests

   6     5    1    8     5     3  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Duke Energy Corporation

  $435    $(222 $657   $946    $223    $723  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 
   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2011  2010   Increase
(Decrease)
  2011   2010   Increase
(Decrease)
 
   (in millions) 

Operating revenues

  $3,964   $3,946    $18   $11,161    $10,827    $334  

Operating expenses

   3,192    2,915     277    8,910     9,056     (146

(Losses) gains on sales of other assets and other, net

   (5  2     (7  9     9     —    
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Operating income

   767    1,033     (266  2,260     1,780     480  

PART I

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2011  2010  Increase
(Decrease)
  2011   2010   Increase
(Decrease)
 
   (in millions) 

Other income and expenses, net

   123    136    (13  431     380     51  

Interest expense

   213    202    11    635     624     11  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   677    967    (290  2,056     1,536     520  

Income tax expense from continuing operations

   208    301    (93  633     643     (10
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Income from continuing operations

   469    666    (197  1,423     893     530  

Income from discontinued operations, net of tax

   1    —      1    1     1     —    
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Net income

   470    666    (196  1,424     894     530  

Less: Net (loss) income attributable to noncontrolling interests

   (2  (4  2    6     1     5  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Net income attributable to Duke Energy Corporation

  $472   $670   $(198 $1,418    $893    $525  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

The following is a summary discussion of the consolidated results of operations and variances, which is followed by a discussion of results by segment.

Consolidated Operating Revenues

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010.Consolidated operating revenues for the three months ended JuneSeptember 30, 2011, increased $247$18 million compared to the same period in 2010. This change was primarily driven by the following:

 

A $127An $87 million increase at International Energy. See Operating Revenues discussion within “Segment Results” for International Energy below for further information.

Partially offsetting this increase was:

A $50 million decrease at Commercial Power. See Operating Revenues discussion within “Segment Results” for Commercial Power below for further information;

An $18 million decrease at U.S. Franchised Electric and Gas (USFE&G). See Operating Revenues discussion within “Segment Results” for USFE&G below for further information; and

 

A $96$3 million decrease at Other. See Operating Revenues discussion within “Segment Results” for Other below for further information.

Nine Months Ended September 30, 2011, as Compared to September 30, 2010.Consolidated operating revenues for the nine months ended September 30, 2011, increased $334 million compared to the same period in 2010. This change was primarily driven by the following:

A $195 million increase at International Energy. See Operating Revenues discussion within “Segment Results” for International Energy below for further information;

A $116 million increase at USFE&G. See Operating Revenues discussion within “Segment Results” for USFE&G below for further information; and

 

A $55$70 million increase at Commercial Power. See Operating Revenues discussion within “Segment Results” for Commercial Power below for further information.

Partially offsetting these increases was:

 

A $28$48 million decrease at Other. See Operating Revenues discussion within “Segment Results” for Other below for further information.

Six Months Ended June 30, 2011 as Compared to June 30, 2010.Consolidated operating revenues for the six months ended June 30, 2011 increased $316 million compared to the same period in 2010. This change was primarily driven by the following:

A $134 million increase at USFE&G. See Operating Revenues discussion within “Segment Results” for USFE&G below for further information;

A $120 million increase at Commercial Power. See Operating Revenues discussion within “Segment Results” for Commercial Power below for further information; and

A $108 million increase at International Energy. See Operating Revenues discussion within “Segment Results” for International Energy below for further information.

Partially offsetting these increases was:

A $45 million decrease at Other. See Operating Revenues discussion within “Segment Results” for Other below for further information.

Consolidated Operating Expenses

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010.Consolidated operating expenses for the three months ended JuneSeptember 30, 2011, decreased $447increased $277 million compared to the same period in 2010. This change was primarily driven by the following:

 

A $611$213 million decreaseincrease at USFE&G. See Operating Expenses discussion within “Segment Results” for USFE&G below for further information;

A $68 million increase at Commercial Power. See Operating Expenses discussion within “Segment Results” for Commercial Power below for further information; and

 

A $70$56 million increase at International Energy. See Operating Expenses discussion within “Segment Results” for International Energy below for further information.

Partially offsetting these increases was:

A $62 million decrease at Other. See Operating Expenses discussion within “Segment Results” for Other below for further information.

Nine Months Ended September 30, 2011, as Compared to September 30, 2010.Consolidated operating expenses for the nine months ended September 30, 2011, decreased $146 million compared to the same period in 2010. This change was primarily driven by the following:

A $443 million decrease at Commercial Power. See Operating Expenses discussion within “Segment Results” for Commercial Power below for further information; and

PART I

A $236 million decrease at Other. See Operating Expenses discussion within “Segment Results” for Other below for further information.

Partially offsetting these decreases were:

 

A $182$430 million increase at USFE&G. See Operating Expenses discussion within “Segment Results” for USFE&G below for further information; and

 

A $55 million increase at International Energy. See Operating Expenses discussion within “Segment Results” for International Energy below for further information.

Six Months Ended June 30, 2011 as Compared to June 30, 2010.Consolidated operating expenses for the six months ended June 30, 2011 decreased $423 million compared to the same period in 2009. This change was primarily driven by the following:

A $511 million decrease at Commercial Power. See Operating Expenses discussion within “Segment Results” for Commercial Power below for further information; and

A $174 million decrease at Other. See Operating Expenses discussion within “Segment Results” for Other below for further information.

Partially offsetting these decreases were:

A $217 million increase at USFE&G. See Operating Expenses discussion within “Segment Results” for USFE&G below for further information; and

A $46$102 million increase at International Energy. See Operating Expenses discussion within “Segment Results” for International Energy below for further information.

Consolidated (Losses) Gains on Sales of Other Assets and Other, Net

Consolidated (losses) gains on sales of other assets and other, net, was $4a loss of $5 million and $5a gain of $2 million for the three months ended JuneSeptember 30, 2011, and 2010, respectively. The decrease is attributable to a loss on the sale of a corporate asset in 2011 compared to net gains on the sales of emission allowances in 2010 at USFE&G and Commercial Power.

Consolidated (losses) gains on sales of other assets and other, net was $14 million and $7 million for the sixnine months ended JuneSeptember 30, 2011, and 2010, respectively. The increase is attributable primarily to 2011 gains on sales of certain assets resulting from a Commercial Power contract termination.

Consolidated Operating Income (Loss)

Consolidated operating income (loss) for the three months ended June 30, 2011 increased $693 millionconsistent when compared to the same period in 2010. Drivers to operating income (loss) are discussed above.

Consolidated operating income (loss) for the six months ended June 30, 2011 increased $746 million compared to the same period in 2010. Drivers to operating income (loss) are discussed above.

Consolidated Other Income and Expenses, netNet

Consolidated other income and expenses, net, for the three months ended JuneSeptember 30, 2011, decreased $13 million compared to the same period in 2010. The decrease was driven primarily by unfavorable returns on investments that support benefit obligations; partially offset by higher equity earnings of $21 million primarily from International Energy’s investment in National Methanol Company (NMC),

Consolidated other income and expenses, net, for the nine months ended September 30, 2011, increased $33$51 million compared to the same period in 2010. The increase was driven primarily by $14 million in gains on investments that support benefit obligations, higher equity earnings of $12$34 million primarily from International Energy’s investment in National Methanol Company (NMC) andNMC, a higher equity component of allowance for funds used during construction (AFUDC) of $8$20 million due to additional capital spending for ongoing construction projects.

Consolidated other incomeprojects, and expenses, net for the six months ended June 30, 2011 increased $64 million compared to the same period in 2010. The increase was driven primarily by a $20 million Peru arbitration award, $16 million in gainsaward; partially offset by unfavorable returns on investments that support benefit obligations, higher equity earnings of $15 million primarily from International Energy’s investment in NMC and a higher equity component of AFUDC of $13 million due to additional capital spending for ongoing construction projects.

PART I

obligations.

Consolidated Interest Expense

Consolidated interest expense for both the three and nine months ended JuneSeptember 30, 2011, decreased $9increased $11 million compared to the same periodperiods in 2010. The decreaseincrease is due primarily to higher capitalized interest, including the debt component of AFUDC due to increased spending on capital projects.

Consolidated interest expense for the six months ended June 30, 2011 is consistent when comparedrelated to the same periodincome taxes and higher debt balances in 2010.2011.

Consolidated Income Tax Expense from Continuing Operations

Consolidated income tax expense from continuing operations for the three months ended JuneSeptember 30, 2011, increased $76decreased $93 million compared to the same period in 2010, primarily due to an increasea decrease in pre-tax income. The effective tax rate for each of the three months ended JuneSeptember 30, 2011 and 2010 was 30%31%.

Consolidated income tax expense from continuing operations for the nine months ended September 30, 2011, decreased $10 million compared to the same period in 2010, primarily due to a decrease in the effective tax rate. The effective tax rate for the nine months ended September 30, 2011, and (114)%2010 was 31% and 42%, respectively. The change in the effective tax rate is primarily due to a $500 million impairment of non-deductible goodwill in the three months ended June 30, 2010.

Consolidated income tax expense from continuing operations for the six months ended June 30, 2011 increased $83 million compared to the same period in 2010, primarily due to an increase in pre-tax income. The effective tax rate for the six months ended June 30, 2011 and 2010 was 31% and 60%, respectively. The change in the effective tax rate is primarily due to a $500 million impairment of non-deductible goodwill in the six months ended June 30, 2010.

Segment Results

Management evaluates segment performance based on earnings before interest and taxes from continuing operations (excluding certain allocated corporate governance costs), after deducting amounts attributable to noncontrolling interests related to those profits (EBIT). On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of the amounts attributable to noncontrolling interests related to those profits. Cash, cash equivalents and short-term investments are managed centrally by Duke Energy, so interest and dividend income on those balances, as well as gains and losses on remeasurement of foreign currency denominated balances, are excluded from the segments’ EBIT. Management considers segment EBIT to be a good indicator of each segment’s operating performance from its continuing operations, as it represents the results of Duke Energy’s ownership interest in operations without regard to financing methods or capital structures.

See Note 2 to the Unaudited Condensed Consolidated Financial Statements, “Business Segments,” for a discussion of Duke Energy’s segment structure.

Duke Energy’s segment EBIT may not be comparable to a similarly titled measure of another company because other entities may not calculate EBIT in the same manner. Segment EBIT is summarized in the following table, and detailed discussions follow.

EBIT by Business Segment

 

  Three Months  Ended
June 30,
 Six Months  Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011 2010 2011 2010   2011 2010 2011 2010 
  (in millions)   (in millions) 

U.S. Franchised Electric and Gas

  $619   $671   $1,331   $1,415    $721   $946   $2,052   $2,361  

Commercial Power

   59    (604  150    (475   67    188    217    (287

International Energy

   179    126    359    266     168    110    527    376  
               

 

  

 

  

 

  

 

 

Total reportable segment EBIT

   857    193    1,840    1,206     956    1,244    2,796    2,450  

Other

   (57  (122  (102  (268   (74  (100  (176  (368
               

 

  

 

  

 

  

 

 

Total reportable segment and other EBIT

   800    71    1,738    938     882    1,144    2,620    2,082  

Interest expense

   (203  (212  (422  (422   (213  (202  (635  (624

Interest income and other(a)

   25    26    46    37     7    25    53    62  

Add back of noncontrolling interest component of reportable segment and Other EBIT

   11    13    17    16     1    —      18    16  
               

 

  

 

  

 

  

 

 

Consolidated (loss) income from continuing operations before income taxes

  $633   $(102 $1,379   $569  

Consolidated income from continuing operations before income taxes

  $677   $967   $2,056   $1,536  
               

 

  

 

  

 

  

 

 

PART I

 

(a)Other within Interest Income and other includes foreign currency transaction gains and losses and additional noncontrolling interest amounts not allocated to the reportable segment and Other EBIT.

Noncontrolling interest amounts presented in certain tables below includes only expenses and benefits related to EBIT of Duke Energy’s joint ventures. It does not include the noncontrolling interest component related to interest and taxes of the joint ventures.

Segment EBIT, as discussed below, includes intercompany revenues and expenses that are eliminated in the Condensed Consolidated Financial Statements.

PART I

USFE&G

USFE&G includes the regulated operations of Duke Energy Carolinas, Duke Energy Indiana, Duke Energy Kentucky and certain regulated operations of Duke Energy Ohio.

 

  Three Months Ended June 30, Six Months Ended June 30,   Three Months Ended September 30, Nine Months Ended September 30, 
  2011   2010   Increase
(Decrease)
 2011   2010   Increase
(Decrease)
   2011   2010   Increase
(Decrease)
 2011   2010   Increase
(Decrease)
 

(in millions, except where noted)

                      

Operating revenues

  $2,549    $2,422    $127   $5,232    $5,098    $134    $2,926    $2,944    $(18 $8,158    $8,042    $116  

Operating expenses

   1,994     1,812     182    4,027     3,810     217     2,278     2,065     213    6,305     5,875     430  

Gains on sales of other assets and other, net

   1     3     (2  1     5     (4   1     1     —      2     6     (4
                         

 

   

 

   

 

  

 

   

 

   

 

 

Operating income

   556     613     (57  1,206     1,293     (87   649     880     (231  1,855     2,173     (318

Other income and expenses, net

   63     58     5    125     122     3     72     66     6    197     188     9  
                         

 

   

 

   

 

  

 

   

 

   

 

 

EBIT

  $619    $671    $(52 $1,331    $1,415    $(84  $721    $946    $(225 $2,052    $2,361    $(309
                         

 

   

 

   

 

  

 

   

 

   

 

 

Duke Energy Carolinas’ GWh sales(a)

   20,210     20,308     (98  40,794     41,824     (1,030   22,832     23,608     (776  63,626     65,432     (1,806

Duke Energy Midwest’s GWh sales(a)(b)

   13,917     14,443     (526  28,689     29,604     915     16,127     16,592     (465  44,816     46,196     (1,380

Net proportional MW capacity in operation(c)

        26,907     26,947     (40        26,907     26,877     30  

 

(a)Gigawatt-hours (GWh).
(b)Duke Energy Ohio (Ohio transmission and distribution only), Duke Energy Indiana and Duke Energy Kentucky collectively referred to as Duke Energy Midwest within this USFE&G segment discussion.
(c)Megawatt (MW).

The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Carolinas for the three and sixnine months ended JuneSeptember 30, 2011, compared to the same period in the prior year. Except as otherwise noted, the below percentages represent billed sales only and are not weather normalized.

 

  Three Months  Ended
June 30, 2011
 Six Months  Ended
June 30, 2011
   Three Months Ended
September 30, 2011
 Nine Months Ended
September 30, 2011
 

Increase (decrease) over prior year

      

Residential sales(a)

   1.1  (4.4)%    (4.3%)   (4.3%) 

General service sales(a)

   0.3  (0.6)%    (1.7%)   (1.0%) 

Industrial sales(a)

   1.3  2.1   (0.1%)   1.3

Wholesale power sales

   16.4  2.8   4.4  3.4

Total Duke Energy Carolinas sales(b)

   (0.5)%   (2.5)%    (3.3%)   (2.8%) 

Average number of customers

   0.3  0.3   0.4  0.3

 

(a)Major components of Duke Energy Carolinas’ retail sales.
(b)Consists of all components of Duke Energy Carolinas’ sales, including all billed and unbilled retail sales, and wholesale sales to incorporated municipalities and to public and private utilities and power marketers.

PART I

The following table shows the percent changes in GWh sales and average number of electric customers for Duke Energy Midwest for the three and sixnine months ended JuneSeptember 30, 2011, compared to the same period in the prior year. Except as otherwise noted, the below percentages represent billed sales only and are not weather normalized.

 

  Three Months  Ended
June 30, 2011
 Six Months  Ended
June 30, 2011
   Three Months Ended
September 30, 2011
 Nine Months Ended
September 30, 2011
 

Increase (decrease) over prior year

      

Residential sales(a)

   3.2  (0.8)%    (3.2%)   (1.7%) 

General service sales(a)

   (0.9)%   (0.4)%    (1.2%)   (0.7%) 

Industrial sales(a)

   2.1  (0.4)%    0.5  (0.1%) 

Wholesale power sales

   (16.0)%   (14.0)%    (11.6%)   (13.3%) 

Total Duke Energy Midwest sales(b)

   (3.6)%   (3.1)%    (2.8%)   (3.0%) 

Average number of customers

   0.3  0.2   0.1  0.1

 

(a)Major components of Duke Energy Midwest’s retail sales.
(b)Consists of all components of Duke Energy Midwest’s sales, including all billed and unbilled retail sales, and wholesale sales to incorporated municipalities and to public and private utilities and power marketers.

PART I

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The increasedecrease was driven primarily by:

 

An $87 million increase in fuel revenues (including emission allowances) driven primarily by higher fuel rates for electric retail customers in the Midwest and South Carolina, and higher purchased power costs in Indiana, partially offset by lower fuel rates for electric retail customers in North Carolina, and lower natural gas fuel rates in Ohio and Kentucky. Fuel revenues represent sales to retail and wholesale customers;

A $41 million net increase in retail rates and rate riders primarily due to the implementation of the North Carolina construction work in progress (CWIP) rider effective January 2011, and riders for the Edwardsport integrated gasification combined cycle (IGCC) plant that is currently under construction and the save-a-watt (SAW) program; and

A $10 million increase in wholesale power revenues, net of sharing, primarily due to the addition of new customers served and additional volumes under long-term contracts in the Carolinas.

Partially offsetting these increases was:

A $31 million decrease in GWh sales to retail customers due to less favorable weather conditions in 2011 compared to the same period in 2010. For the Carolinas, cooling degree days for the secondthird quarter of 2011 were 31%17% above normal as compared to 51%27% above normal during the same period in 2010. For the Midwest, cooling degree days for the secondthird quarter of 2011 were 17%29% above normal as compared to 51%32% above normal during the same period in 2010. For the Carolinas, the third quarter 2010 was the warmest third quarter on record (dating back to 1961).

Partially offsetting this decrease was:

A $33 million net increase in retail rates and rate riders primarily due to the implementation of the North Carolina construction work in progress (CWIP) rider effective January 2011, and Indiana’s demand side management (DSM) rider.

Operating Expenses.The increase was driven primarily by:

 

An $86A $178 million increase in fuel expense (including purchased power and natural gas purchases for resale) primarilydue to an additional impairment charge related to purchases of power in Indiana, mainly as a result of decreased generation caused by increased outages in 2011 comparedthe Edwardsport integrated gasification combined cycle (IGCC) plant that is currently under construction. See Note 4 to the same period in 2010,Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters,” for additional information; and higher prices of coal used in electric generation;

 

A $76$42 million increase in operating and maintenance expense primarily due to higher stormnon-outage costs and higher maintenance at nuclear and fossil generation stations;stations, higher storm costs and

A $13 million increase in property increased scheduled outage costs at nuclear and other taxes primarily due to overall higher property taxes.fossil generation stations, partially offset by lower benefit costs.

EBITOther Income and Expenses, net..The increase resulted primarily from a higher equity component of AFUDC from additional capital spending for increased construction expenditures related to new generation.

EBIT. As discussed above, the decrease resulted primarily from the additional impairment charge related to the Edwardsport IGCC plant, higher operating and maintenance expenses and less favorable weather and higher property and other taxes.weather. These negative impacts were partially offset by overall net higher retail rates and rate riders and higher wholesale power revenues.riders.

SixNine Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 20102010.

Operating Revenues.The increase was driven primarily by:

 

A $112$143 million net increase in retail rates and rate riders primarily due to new retail rates resulting from the implementation of the North Carolina CWIP rider, riders for the Edwardsport IGCC plant that is currently under construction, and the SAWsave-a-watt (SAW) program, and the year-over-year impact of the new retail rates resulting from the South Carolina rate case in the first quarter of 2010;DSM program;

 

An $85$86 million increase in fuel revenues (including emission allowances) driven primarily by higher fuel rates for electric retail customers in the Midwest and South Carolina, and higher purchased power costs in Indiana, partially offset by decreased demand from electric retail customers in 2011 compared to the same period in 2010 mainly due to less favorable weather conditions, and lower fuel rates for electric retail customers in North Carolina, lower natural gas fuel rates in Ohio and Kentucky, and lower demand from natural gas retail customers. Fuel revenues represent sales to retail and wholesale customers; and

 

A $13$19 million increase in wholesale power revenues, net of sharing, primarily due to the addition of new customers served and additional volumes under long-term contracts and increases in charges for capacity.

Partially offsetting these increases was:

 

A $90$130 million decrease in GWh and thousand cubic feet (Mcf) sales to retail customers due to less favorable weather conditions in 2011 compared to the same period in 2010. For the Carolinas and Midwest, weather statistics for both heating degree days and cooling degree days in 2011 were unfavorable compared to the same period in 2010.

Operating Expenses.The increase was driven primarily by:

 

A $128$178 million increase due to an additional impairment charge related to the Edwardsport IGCC plant that is currently under construction. See Note 4 to the Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters,” for additional information;

A $170 million increase in operating and maintenance expense primarily due to higher storm costs, higher maintenancenon-outage costs at nuclear and fossil generation stations, higher power and gas delivery maintenance costs, increased scheduled outage costs at nuclear generation stations, and increased costs related to the implementation of the SAW program; and

 

An $86A $75 million increase in fuel expense (including purchased power and natural gas purchases for resale) primarily related to purchases of power in Indiana (mainly as a result of decreased generation caused by increased outages in 2011 compared to

PART I

the same period in 2010) and in the Carolinas, and higher prices of coal used in electric generation, partially offset by lower volume of coal used in electric generation resulting from less favorable weather conditions, and lower natural gas prices and volumes to full-service retail customers.

Gains on Sales of Other Assets and Other, Net.The decrease is attributable primarily to lower net gains on sales of emission allowances in 2010) and in the Carolinas, and higher prices of coal used in electric generation, partially offset by lower volume of coal used in electric generation resulting from less favorable weather conditions, and lower natural gas prices and volumes2011 compared to full-service retail customers.2010.

EBIT.EBIT. As discussed above, the decrease resulted primarily from less favorable weather andadditional impairment charge related to the Edwardsport IGCC plant, higher operating and maintenance expenses.expenses and less favorable weather. These negative impacts were partially offset by overall net higher retail rates and rate riders and higher wholesale power revenues.

Matters Impacting Future USFE&G Results

Results of USFE&G are impacted by the completion of its major generation fleet modernization projects. See Note 4 to the Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters,” for a discussion of the significant increase in the estimated cost of the 618 MW IGCC plant at Duke Energy Indiana’s Edwardsport Generating Station. Additional updates to the cost estimate could occur through the completion of the plant in 2012.

Duke Energy Carolinas has filed rate cases in North Carolina and South Carolina during 2011. Duke Energy Carolinas plans to file rate cases in North Carolina and South Carolina during 2012. Duke Energy Indiana plans to file a rate case in 2012. Duke Energy Ohio is evaluating the need for an electric distribution rate case in 2012. These planned rates cases are needed to recover investments in Duke Energy’s ongoing infrastructure modernization projects and operating costs. USFE&G’s earnings could be adversely impacted if any of these rate cases are denied or delayed by the various state regulatory commissions.

USFE&G evaluates the carrying amount of its recorded goodwill for impairment on an annual basis as of August 31 and performs interim impairment tests if a triggering event occurs that indicates it is more likely than not that the fair value of a reporting unit is less than its carrying value. For further information on key assumptions that impact USFE&G’s goodwill impairment assessments, see “Critical Accounting Policy for Goodwill Impairment Assessments” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010. As of the August 31, 2010 impairment analysis, the fair value of the Ohio Transmission and Distribution (Ohio T&D) reporting unit exceeded its carrying value at Duke Energy, therefore no goodwill impairment charge was recorded. However, the fair value of the Ohio T&D reporting unit, which has a goodwill balance of $700 million as of June 30, 2011, exceeded its carrying value by approximately 15%. Management is continuing to monitor the impact of recent market and economic events to determine if it is more likely than not that the carrying value of the

Ohio T&D reporting unit has been impaired. Should any such triggering events or circumstances occur in 2011 that would more likely than not reduce the fair value of the Ohio T&D reporting unit below its carrying value, management would again perform an interim impairment test of the Ohio T&D goodwill and it is possible that a goodwill impairment charge could be recorded as a result of this test. Potential circumstances that could have a negative effect on the fair value of the Ohio T&D reporting unit include additional declines in load volume forecasts, changes in the weighted average cost of capital (WACC) and the equity valuations of peer companies, changes in the timing and/or recovery of and on investments in SmartGrid technology, and the success of future rate case filings.

Commercial Power

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011   2010 Increase
(Decrease)
 2011   2010 Increase
(Decrease)
   2011   2010   Increase
(Decrease)
 2011   2010 Increase
(Decrease)
 

(in millions, except where noted)

                   

Operating revenues

  $595    $540   $55   $1,239    $1,119   $120    $687    $737    $(50 $1,926    $1,856   $70  

Operating expenses

   544     1,155    (611  1,102     1,613    (511   621     553     68    1,723     2,166    (443

Gains on sales of other assets and other, net

   11     4    7    13     3    10  

Losses on sales of other assets and other, net

   2     1     1    15     4    11  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Operating income

   62     (611  673    150     (491  641     68     185     (117  218     (306  524  

Other income and expenses, net

   5     12    (7  10     21    (11   1     5     (4  11     26    (15

Expense attributable to noncontrolling interest

   8     5    3    10     5    5     2     2     —      12     7    5  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

EBIT

  $59    $(604 $663   $150    $(475 $625    $67    $188    $(121 $217    $(287 $504  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Actual Plant Production, GWh

   7,072     6,551    521    15,369     13,125    2,245     8,813     7,606     1,207    24,182     20,731    3,451  

Proportional MW capacity in operation

       8,273     8,005    268          8,300     8,005    295  

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The increasedecrease was driven primarily by:

A $57 million increase in wholesale electric revenues due to higher generation volumes, net of lower pricing;

A $38 million increase in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of insignificant mark-to-market losses in 2011 compared to losses of $38 million in 2010; and

A $17 million increase in renewables generation revenues due primarily to additional wind generation facilities placed in service after the second quarter of 2010.

Partially offsetting these increases were:

 

A $56 million decrease in retail electric revenues resulting from lower sales volumes driven by increased customer switching levels and unfavorable weather, net of higher retail pricing under the Electric Security Plan (ESP) in 2011.2011;

A $30 million decrease in Duke Energy Generation Services, Inc. (DEGS) revenues, excluding renewables, due primarily to a contract termination and plant maintenance;

A $24 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market gains of $2 million in 2011 compared to gains of $26 million in 2010; and

A $9 million decrease in PJM Interconnection, LLC (PJM) capacity revenues due to lower cleared auction pricing in 2011 compared to 2010, partially offset by additional megawatts participating in the auction.

Partially offsetting these decreases were:

A $60 million increase in wholesale electric revenues due to higher generation volumes, net of lower pricing; and

A $12 million increase in renewables generation revenues due primarily to additional wind generation facilities placed in service after the third quarter of 2010.

Operating Expenses.Expenses.The decreaseincrease was driven primarily by:

 

A $651 million decrease in impairment charges primarily related to a $660$79 million impairment charge related to goodwill and non-regulated coal-fired generation asset impairmentsrecorded in the Midwest in 2010.third quarter of 2011 to write down the carrying value of excess emission allowances held to fair value as a result of the Environmental Protection Agency’s (EPA) issuance of the Cross-State Air Pollution Rule (CSAPR). See Note 7 to the Unaudited Condensed Consolidated Financial Statements, “Goodwill, Intangible Assets and Impairments,” for additional information; and

 

A $20 million decrease in retail fuel and purchased power expenses due to lower generation volumes net of higher purchased power volumes in 2011 as compared to 2010.

Partially offsetting these decreases were:

A $41$46 million increase in wholesale fuel expenses due to higher generation volumes;

 

A $10 million increase in operating expenses resulting primarily from higher maintenance expenses at operated and non-operated generation stations and higher transmission costs in 2011 compared to 2010; and

A $6An $8 million increase in mark-to-market fuel expense on non-qualifying fuel hedge contracts, consisting of mark-to-market losses of $1 million in 2011 compared to gains of $5$7 million in 2010.

Gains on Sales of Other AssetsPartially offsetting these increases were:

A $37 million decrease in retail fuel and Other, net.The increasepurchased power expenses due to lower generation and purchased power volumes in 2011 as compared to 2010 is attributable2010; and

A $25 million decrease in DEGS fuel expense, excluding renewables, due primarily to 2011 gains on sales of certain assets resulting from a contract termination.termination and plant maintenance.

PART I

Other Income and Expenses, net.The decrease in 2011 as compared to 2010 is primarily due to distributions from South Houston Green Power received in 2010 which did not recur in 2011.

EBIT. The increasedecrease is primarily attributable to lower goodwill and generating assethigher emission allowance impairment charges, lower net mark-to-market lossesgains on non-qualifying commodity hedge contracts in 2011 compared to 2010, an increase in renewables generation revenues, net ofand lower retail margins driven by customer switching.PJM capacity revenues.

SixNine Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The increase was driven primarily by:

 

A $154$213 million increase in wholesale electric revenues due to higher generation volumes;volumes, net of lower pricing and margin earned from participation in wholesale auctions in 2011;

 

A $35$47 million increase in renewables generation revenues due to additional wind generation facilities placed in service after the secondthird quarter of 2010; and

 

A $27An $18 million increase in PJM capacity revenues due to higher average cleared auction pricing and additional MWs participating in the auction in 2011 compared to 2010;2010 and

A $16 million increase additional megawatts participating in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $1 million in 2011 compared to losses of $17 million in 2010.the auction.

Partially offsetting these increases was:were:

 

A $107$163 million decrease in retail electric revenues resulting from lower sales volumes driven by increased customer switching levels and unfavorable weather net of higher retail pricing under the ESP in 2011.2011;

A $38 million decrease in DEGS revenues, excluding renewables, due primarily to a contract termination and plant maintenance; and

A $9 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of insignificant mark-to-market gains in 2011 compared to gains of $9 million in 2010.

Operating Expenses.The decrease was driven primarily by:

 

A $651$572 million decrease in impairment charges primarily related to a $660 million charge related to goodwill and non-regulated coal-fired generation asset impairments in the Midwest in 2010.2010, as compared to a $79 million impairment in 2011 to write down the carrying value of excess emission allowances held to fair value as a result of the EPA’s issuance of the Cross-State Air Pollution Rule (CSAPR) and a $9 million impairment of the Vermillion generation station in 2011. See Note 7 to the Unaudited Condensed Consolidated Financial Statements, “Goodwill, Intangible Assets and Impairments,” for additional information; and

 

A $34$71 million decrease in retail fuel and purchased power expenses due to lower generation volumes net of higher purchased power volumes in 2011 as compared to 2010.2010; and

A $26 million decrease in DEGS fuel expense due primarily to a contract termination and plant maintenance.

Partially offsetting these decreases were:

 

A $112$158 million increase in wholesale fuel expenses due to higher generation volumes net of favorable hedge realizations in 2011 as compared to 2010;

 

A $42$37 million increase in operating expenses resulting primarily from higher maintenance expenses at operated and non-operated generation stations and higher transmission costs in 2011 compared to 2010; and

 

A $16$23 million increase in mark-to-market fuel expense on non-qualifying fuel hedge contracts, consisting of mark-to-market losses of $3 million in 2011 compared to gains of $13$20 million in 2010.2010; and

Gains on Sales of Other Assets and Other, net.The increase in 2011 as compared to 2010 is attributable to 2011 gains on sales of certain assets resulting from a contract termination.

Other Income and Expenses, net.The decrease in 2011 as compared to 2010 is primarily due to distributions from South Houston Green Power received in 2010 which did not recur in 2011.

EBIT. The increase is primarily attributable to lower goodwill, generation and generatingother asset impairment charges, an increase in renewables generation revenues, and higher PJM capacity revenues, net of higher net mark-to-market losses on non-qualifying commodity hedge contracts in 2011 compared to 2010 and lower retail margins driven by customer switching.

Matters Impacting Future Commercial Power Results

Commercial Power operates in Ohio under an ESP that expires on December 31, 2011. On June 20, 2011, Duke Energy Ohio filed for approval of its next Standard Service Offer (SSO) to replace the existing ESP. The filing seeks approvalOn October 24, 2011, Commercial Power entered into a settlement stipulation. If approved by the Public Utilities Commission of Ohio (PUCO), the stipulation would establish an ESP that would lastwith competitive auctions for a term of nine years and five months.January 1, 2012, through May 31, 2015. The ESP would unbundle generation service by separating capacity (physical assets) from energy (actual output). The capacity component would be paid by all customers through an unavoidable charge, adjusted on an annual basis, with all customers sharing in the net profits from Duke Energy Ohio’s sale of energy and ancillary services. The energy component would be procured throughstipulation also includes a competitive bidding process and would be avoidable by customers who choose alternative suppliers. The capacity charge would provideprovision for a returnnon-bypassable stability charge of $110 million per year to be collected from 2012 through 2014 and on investment in Duke Energy Ohio’srequires Commercial Power to transfer its Ohio generation assets andto a non-regulated affiliate at net book value on or before December 31, 2014. The stipulation requests that the costPUCO approve the settlement on or before November 15, 2011, to acquire capacityallow Commercial Power to meet reserve margin requirements. Hearings for this filing are scheduledconduct auctions to begin in September 2011.serve SSO customers effective January 1, 2012. A hearing on the stipulation was held on November 3, 3011. Commercial Power’s earnings after the expiration of the current ESP could be significantly different than its historical earnings.

The majority of Commercial Power’s gas-fired non-regulated generation assets earn capacity revenues from PJM. PJM capacity prices are determined through an auction process for planning years from June through May of the following year and are conducted approximately three years in advance of the capacity delivery period. Capacity prices for periods beginning June 2011 and continuing through May 2014 will be significantly lower than current and historical capacity prices. As a result, Commercial Power’s operating revenues and EBIT will be negatively impacted through 2014.

On July 6, 2011, the EPA issued the Cross-State Air Pollution Rule (CSAPR) which replaces the Clean Air Interstate Rule (CAIR). See Note 5, “Commitments and Contingencies,” to the Consolidated Financial Statements for a discussion of this rule. Duke Energy is currently evaluating the effect of the rule on the carrying value of emission allowances held by Commercial Power. Based on the provisions of the CSAPR, Commercial Power expects to have more SO2 allowances than will be needed to comply with the continuing Clean Air Act (CAA) acid rain cap-and-trade program (excess emission allowances). Commercial Power expects to incur a pre-tax impairment of approximately $80 million in the third quarter of 2011 to write down the carrying value of excess emission allowances held to fair value. This current estimate is based on the total allowances held by Commercial Power for compliance under the continuing CAA acid rain cap-and-trade program as of June 30, 2011.

PART I

International Energy

 

  Three Months Ended
June 30,
 Six Months Ended
June  30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011   2010   Increase
(Decrease)
 2011   2010 Increase
(Decrease)
   2011   2010   Increase
(Decrease)
 2011   2010 Increase
(Decrease)
 

(in millions, except where noted)

                    

Operating revenues

  $406    $310    $96   $754    $646   $108    $360    $273    $87   $1,114    $919   $195  

Operating expenses

   262     207     55    471     425    46     236     180     56    707     605    102  

Losses on sales of other assets and other, net

   —       —       —      —       (1  1  

Gains on sales of other assets and other, net

   —       —       —      —       (1  1  
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Operating income

   144     103     41    283     220    63     124     93     31    407     313    94  

Other income and expenses, net

   42     30     12    89     59    30     49     23     26    138     82    56  

Expense attributable to noncontrolling interest

   7     7     —      13     13    —       5     6     (1  18     19    (1
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

EBIT

  $179    $126    $53   $359    $266   $93    $168    $110    $58   $527    $376   $151  
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

 

Sales, GWh

   4,516     5,041     (525  9,303     10,732    (1,429   4,565     4,426     139    13,868     15,158    (1,290

Proportional MW capacity in operation

        4,190     4,203    (13        4,190     4,203    (13

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The increase was driven primarily by:

 

A $63$32 million increase in Peru as a result of higher average prices and energy sales volumes;

A $28 million increase in Central America due to higher average prices and dispatch as a result of drier weather;favorable hydrology; and

 

A $27$26 million increase in Brazil due to favorable exchange rates, higher spot volumes as a result of favorable exchange rateshydrology, and higher average contract prices;prices.

Operating Expenses.The increase was driven primarily by:

A $26 million increase in Peru as a result of higher power purchased costs, increased fuel consumption, and other variable costs due to increased dispatch;

A $19 million increase in Central America due to higher fuel costs and consumption as a result of increased dispatch; and

 

A $13 million increase in PeruBrazil due to the absence of prior year environmental provision reversals, a provision for a revenue tax audit, and unfavorable exchange rates.

Other Income and Expenses, net.The increase was driven primarily by a $21 million increase in equity earnings from NMC due to higher methyl tertiary butyl ether (MTBE) prices partially offset by higher butane costs.

EBIT.As discussed above, the increase was primarily due to higher average prices in Peru, Central America and Brazil, higher margins at NMC and favorable exchange rates, primarily in Brazil.

Nine Months Ended September 30, 2011, as Compared to September 30, 2010

Operating Revenues.The increase was driven primarily by:

An $84 million increase in Brazil due to favorable exchange rates, higher average contract volumes.prices, and higher spot volumes as a result of favorable hydrology;

A $78 million increase in Central America as a result of favorable hydrology and higher average prices; and

A $58 million increase in Peru as a result of higher average prices and energy sales volumes and higher hydrocarbon revenues.

Partially offsetting these increases was:

 

A $6$26 million decrease in Ecuador as a result of lower dispatch due to unfavorable hydrology.new hydro competitor commencing operations in the fourth quarter of 2010.

Operating Expenses.The increase was driven primarily by:

 

A $43$50 million increase in Central America primarily due to higher fuel pricescosts and consumption as a result of higherincreased dispatch; and

An $11 million increase in Peru primarily due to higher purchased power costs and hydrocarbons royalty costs.

Other Income and Expenses, net.The increase was primarily driven by a $13 million increase in equity earnings from NMC due to higher average pricing for methyl tertiary butyl ether (MTBE) and methanol; partially offset by higher butane costs and lower MTBE volumes due to scheduled maintenance.

EBIT. The increase was primarily due to favorable exchange rates and higher average contract prices in Brazil, favorable hydrology and higher average prices in Central America, and higher equity earnings from NMC.

Six Months Ended June 30, 2011 as Compared to June 30, 2010

Operating Revenues.The increase was driven primarily by:

A $58 million increase in Brazil due to favorable exchange rates and higher average contract prices;

 

A $49 million increase in Central America as a result of higher average prices and dispatch due to drier weather; and

A $26$46 million increase in Peru due to higher average pricesfuel costs and contract volumes.consumption as a result of increased dispatch, and higher purchased power and hydrocarbon royalty costs; and

A $27 million increase in Brazil primarily due to unfavorable exchange rates, absence of prior year environmental provision reversals and a provision for a revenue tax audit.

Partially offsetting these increases was:

 

A $24 million decrease in Ecuador as a result of lower dispatch due to a new hydro competitor commencing operations in the fourth quarter of 2010 and unfavorable hydrology.

Operating Expenses.The increase was driven primarily by:

A $31 million increase in Central America primarily due to higher fuel prices;

A $20 million increase in Peru as a result of higher fuel consumption, purchased power costs and hydrocarbons royalty costs; and

A $15 million increase in Brazil due to unfavorable exchange rates and higher purchased power costs as a result of lower generation.

Partially offsetting these increases was:

A $20 million decrease in Ecuador due to lower fuel consumption as a result of lower dispatch.dispatch, as well as lower operating costs.

Other Income and Expenses, net.The increase was primarily driven by Peru arbitration award, as well as a $13$34 million increase in equity earnings from NMC due to higher average MTBE and methanol prices partially offset by lower MTBE volumes due to scheduled maintenance.higher butane costs, and an arbitration award in Peru.

EBIT. TheAs discussed above, the increase was primarily due to favorable contract prices and exchange rates in Brazil, an arbitration award and higher average contract pricesrevenues in Brazil,Peru, favorable hydrology in Central America, an arbitration award in Peru, and higher equity earnings from NMC.

PART I

Other

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011 2010 Increase
(Decrease)
 2011 2010 Increase
(Decrease)
   2011 2010 Increase
(Decrease)
 2011 2010 Increase
(Decrease)
 
  (in millions)   (in millions) 

Operating revenues

  $9   $37   $(28 $20   $65   $(45  $14   $17   $(3 $34   $82   $(48

Operating expenses

   84    154    (70  166    340    (174   80    142    (62  246    482    (236

Losses on sales of other assets and other, net

   (8  (2  (6  —      —      —       (6  —      (6  (6  —      (6
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

   (83  (119  36    (146  (275  129     (72  (125  53    (218  (400  182  

Other income and expenses, net

   22    (2  24    38    5    33     (8  17    (25  30    22    8  

(Benefit) expense attributable to noncontrolling interests

   (4  1    (5  (6  (2  (4

Benefit attributable to noncontrolling interests

   (6  (8  2    (12  (10  (2
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

EBIT

  $(57 $(122 $65   $(102 $(268 $166    $(74 $(100 $26   $(176 $(368 $192  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Three Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The decrease was driven primarily by the deconsolidation of DukeNet Communications, LLC (DukeNet) in December 2010 and the subsequent accounting for Duke Energy’s investment in DukeNet as an equity method investment and theinvestment; partially offset by mark-to-market activity at Duke Energy Trading and Marketing, LLC (DETM).

Operating Expenses.The decrease was driven primarily by $76a prior year litigation reserve, $20 million of 2010 employee severance costs related to the voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina, and a decrease as a result of the DukeNet consolidationdeconsolidation in December 2010 and the subsequent accounting for Duke Energy’s investment in DukeNet as an equity method investment; partially offset by higher deferred compensation expense due to favorable investment performance and higher underwriting expenses at Bison Insurance Company Limited (Bison).investment.

Losses on sales of other assets and other, net. The decrease is attributable to a loss on the sale of a corporate asset in 2011.

Other Income and Expenses, net. The increasedecrease was driven primarily by favorableunfavorable returns on investments that support benefit obligations in 2011 as compared to lossesgains in 2010 and a reversal of reserves related to certain guarantees Duke Energy had issued on behalf of Crescent JV (Crescent).2010.

EBIT.As discussed above, the increase was due primarily to the prior year litigation reserve, 2010 employee severance costs in the prior year.and mark-to-market activity at DETM; partially offset by unfavorable returns on investments that support benefit obligations.

PART I

SixNine Months Ended JuneSeptember 30, 2011, as Compared to JuneSeptember 30, 2010

Operating Revenues.The decrease was driven primarily by the deconsolidation of DukeNet in December 2010 and the subsequent accounting for Duke Energy’s investment in DukeNet as an equity method investment and theinvestment; partially offset by lower mark-to-market activitylosses in 2011 compared to 2010 at DETM.

Operating Expenses.The decrease was driven primarily by $144$164 million of 2010 employee severance costs related to the voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina, a decrease as a result of the DukeNet consolidationdeconsolidation in December 2010 and the subsequent accounting for Duke Energy’s investment in DukeNet as an equity method investment, a prior year litigation reserve, and a $16 million donation to the Duke Energy Foundation, which is a non-profit organization funded by Duke Energy shareholders that makes charitable contributions to selected non-profits and government subdivisions; partially offset by higher deferred compensation expense due to favorable investment performance.subdivisions.

Losses on sales of other assets and other, net. The decrease is attributable to a loss on the sale of a corporate asset in 2011

Other Income and Expenses, net. The increase was driven primarily by favorable returnsa reversal of reserves related to certain guarantees Duke Energy had issued on investments that support benefit obligations in 2011 compared to losses in 2010,behalf of the Crescent Joint Venture (Crescent) and an increase due to the final settlement of the sale of a 50% ownership interest in DukeNet in the fourth quarter of 2010, and a reversal of reserves relatedpartially offset by unfavorable returns on investments that support benefit obligations in 2011 as compared to certain guarantees Duke Energy had issued on behalf of Crescent.gains in 2010.

EBIT.As discussed above, the increase was due primarily to 2010 employee severance costs, in thea prior year litigation reserve and a donation to the Duke Energy Foundation in the prior year, and a reversal of reserves related to certain guarantees Duke Energy had issued on behalf of Crescent.year.

Matters Impacting Future Other Results

Duke Energy previously held an effective 50% interest in Crescent, which was Duke Energy’s real estate joint venture that filed for Chapter 11 bankruptcy protection in June 2009. On June 9, 2010, Crescent restructured and emerged from bankruptcy and Duke Energy forfeited its entire 50% ownership interest to Crescent debt holders. This forfeiture caused Duke Energy to recognize its share of the net tax loss in the second quarter of 2010. Although Crescent has reorganized and emerged from bankruptcy with creditors owning all Crescent interest, there remains uncertainty as to the tax treatment associated with the restructuring. Based on this uncertainty, it is possible that Duke Energy could incur a future tax liability related to its inability to fully utilize tax losses associated with its partnership interest in Crescent and the resolution of issues associated with Crescent’s emergence from bankruptcy.

PART I

Duke Energy Carolinas

INTRODUCTION

Management’s Discussion and Analysis should be read in conjunction with Duke Energy Carolinas’ Unaudited Condensed Consolidated Financial Statements.

Duke Energy Carolinas, a wholly-owned subsidiary of Duke Energy, is an electric utility company that generates, transmits, distributes and sells electricity in central and western North Carolina and western South Carolina.

BASIS OF PRESENTATION

The results of operations and variance discussion for Duke Energy Carolinas is presented in a reduced disclosure format in accordance with General Instruction H(2) of Form 10-Q.

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011   2010   Increase
(Decrease)
   2011   2010   Increase
(Decrease)
 
  (in millions)   (in millions) 

Operating revenues

  $3,159    $3,058    $101    $5,027    $4,935    $92  

Operating expenses

   2,466     2,403     63     3,794     3,761     33  

Gains on sales of other assets and other, net

   1     5     (4   2     7     (5
              

 

   

 

   

 

 

Operating income

   694     660     34     1,235     1,181     54  

Other income and expenses, net

   92     112     (20   139     163     (24

Interest expense

   171     176     (5   264     271     (7
              

 

   

 

   

 

 

Income before income taxes

   615     596     19     1,110     1,073     37  

Income tax expense

   217     202     15     401     364     37  
              

 

   

 

   

 

 

Net income

  $398    $394    $4    $709    $709    $0  
              

 

   

 

   

 

 

PART I

The $4 million increase in Duke Energy Carolinas’ net income was flat for the sixnine months ended JuneSeptember 30, 2011, compared to JuneSeptember 30, 2010, was primarily due to the following factors:

Operating Revenues.The increase was primarily due to:

 

A $92$135 million net increase in retail rates and rate riders primarily due to the implementation of the North Carolina construction work in progressCWIP rider effective January 2011, riders for the save-a-wattSAW program, and year-over-year impact related to a phase-in of the new retail rates resulting from the South Carolina rate case in the first quarter of 2010;

 

A $66$57 million increase in fuel revenues driven primarily by increased fuel rates in South Carolina; partially offset by lower fuel rates in North Carolina. Fuel revenues represent sales to retail and wholesale customers; and

 

A $13An $18 million increase in wholesale power revenues, net of sharing, primarily due to the addition of new customers served and additional volumes under long-term contracts and increased capacity charges; partially offset by volume decreases and lower pricing for near-term sales.

Partially offsetting these increases was:

 

A $77$109 million decrease in GWh sales to retail customers due to less favorable weather. Weather statistics for both heating degree days and cooling degree days in 2011 were unfavorable compared to 2010. Heating degree days were essentially flat to normal for 2011 as compared to 14%13% above normal in 2010 and cooling degree days for 2011 were 32%22% above normal compared to 49%34% above normal in 2010.

Operating Expenses.The increase was primarily due to:

 

A $67$50 million increase in fuel expense (including purchased power) primarily related to higher economic purchases of power and higher prices of coal usedlargely due to increased scheduled nuclear outages in electric generation.2011 compared to the same period in 2010.

 

OperatingA $16 million increase in depreciation and amortization expense primarily due to increased production plant base and software projects amortization; partially offset by the 2011 deferral of the wholesale portion of GridSouth costs.

Partially offsetting these increases were:

A $24 million decrease in operating and maintenance expenses were essentially flat period over period, withprimarily related to decreased employee severance costs associated with the 2010 voluntary severance plan largelyand a litigation settlement; partially offset by increases in various other areas, including higher outagenon-outage and maintenanceoutage costs at nuclear operatinggeneration plants, costs related to the implementation of the save-a-wattSAW program, higher storm costs and higher power delivery costs, and increased corporate and storm costs.

A $10 million decrease in general taxes primarily due to lower revenue related taxes and a sales and use tax refund; partially offset by overall higher property taxes.

Other Income and Expenses, net.The decrease is primarily due to higher interest income recorded in 2010 following the resolution of certain income tax matters related to prior years, lower deferred returns and lower deferred returns.equity component of AFUDC.

Income Tax Expense.ExpenseThe increase in income.Income tax expense for the sixnine months ended JuneSeptember 30, 2011, increased compared to the same period in the prior year was2010 primarily due to an increase in pre-tax income and an increase in the effective tax rate. The effective tax rate was 35.3% as compared to an effective tax rate of 33.9% for the same period in 2010.nine months ended September 30, 2011 and 2010 was 36.1% and 33.9%, respectively. The increase in the effective tax rate for 2011 wasis primarily due to a decrease in the manufacturing deduction in 2011 and a state tax adjustmentbenefit recorded in 2010, partially offset by the write-off of a deferred tax asset in the first quarter of 2010 due to a change in the tax treatment of the Medicare Part D subsidy due to the passing of health care reform legislation.

PART I

Matters Impacting Future Duke Energy Carolinas Results

Duke Energy Carolinas has filed rate cases in North Carolina and South Carolina during 2011. Duke Energy Carolinas plans to file rate cases in North Carolina and South Carolina during 2012. These planned rates cases are needed to recover investments in Duke Energy Carolinas’ ongoing infrastructure modernization projects and operating costs. Duke Energy Carolinas’ earnings could be adversely impacted if these rate cases are denied or delayed by either of the state regulatory commissions.

PART I

Duke Energy Ohio

INTRODUCTION

Management’s Discussion and Analysis should be read in conjunction with Duke Energy Ohio’s Unaudited Condensed Consolidated Financial Statements.

Duke Energy Ohio is a wholly-owned subsidiary of Cinergy Corp. (Cinergy), which is a wholly-owned subsidiary of Duke Energy. Duke Energy Ohio’s principal lines of business include generation, transmission and distribution of electricity, the sale of and/or transportation of natural gas, and energy marketing.

BASIS OF PRESENTATION

The results of operations and variance discussion for Duke Energy Ohio is presented in a reduced disclosure format in accordance with General Instruction H(2) of Form 10-Q.

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011   2010 Increase
(Decrease)
   2011   2010 Increase
(Decrease)
 
  (in millions)   (in millions) 

Operating revenues

  $1,573    $1,626   $(53  $2,411    $2,549   $(138

Operating expenses

   1,381     2,188    (807   2,105     2,832    (727

Gains on sales of other assets and other, net

   2     3    (1   4     3    1  
             

 

   

 

  

 

 

Operating income (loss)

   194     (559  753     310     (280  590  

Other income and expenses, net

   9     14    (5   17     22    (5

Interest expense

   51     58    (7   78     84    (6
             

 

   

 

  

 

 

Income (loss) before income taxes

   152     (603  755     249     (342  591  

Income tax expense

   46     26    20     92     111    (19
             

 

   

 

  

 

 

Net income (loss)

  $106    $(629 $735    $157    $(453 $610  
             

 

   

 

  

 

 

The $735$610 million increase in Duke Energy Ohio’s net income for the sixnine months ended JuneSeptember 30, 2011, compared to JuneSeptember 30, 2010, was primarily due to the following factors:

Operating Revenues.The decrease was primarily driven by:

 

A $161$199 million decrease in retail electric revenues resulting from lower sales volumes driven by increased customer switching levels net of higher retail pricing under the ESP in 2011;

 

A $36$71 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $16 million in 2011 compared to gains of $55 million in 2010;

A $57 million decrease in retail electric revenues resulting from the expiration of the Ohio electric Regulatory Transition Charge for non-residential customers;

 

A $32$43 million decrease in regulated fuel revenues driven primarily by lower natural gas costs and reduced sales volumes; and

 

A $12$19 million decrease related to less favorable weather conditions in 2011 compared to 2010; and

A $10 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $11 million in 2011 compared to losses of $1 million in 2010;2010.

Partially offsetting these decreases were:

 

A $154$213 million increase in wholesale electric revenues due to higher generation volumes net of lower pricing and lower margin earned from participation in wholesale auctions in 2011;

 

A $27An $18 million increase in PJM capacity revenues due to higher average cleared auction pricing and additional MWmegawatts participating in the auction in 2011 compared to 2010; and

 

A $9An $11 million increase due to higher Midwest Independent Transmission System Operator, Inc.Inc (Midwest ISO) transmission revenue; and

A $9 million increase in retail gas revenues from Ohio recovery riders for Accelerated Main Replacement and uncollectible accounts expense.revenue.

Operating Expenses. The decrease was primarily driven by:

 

An $828A $749 million decrease in impairment charges primarily related to a $677 million impairment of goodwill and a $160 million impairment of certain generation assets andin 2010 compared to a $79 million impairment in 2011 to write down the carrying value of excess emission allowances in 2010.held to fair value as a result of the EPA’s issuance of the CSAPR. See Note 7 to the Unaudited Condensed Consolidated Financial Statements, “Goodwill, Intangible Assets and Impairments,” for additional information.information;

 

An $85A $108 million decrease in retail fuel and purchased power expenses due to lower retail loadgeneration volumes driven by increased customer switching levels in 2011 compared to 2010;

 

A $33$42 million decrease in regulated fuel expense primarily due to lower natural gas costs and reduced sales volumes;

 

A $27$40 million decrease in depreciation and amortization costs primarily due to decreased regulatory amortization; and

 

A $21$23 million decrease in employee severance costs related to the 2010 voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina.

Partially offsetting these decreases were:

 

A $111$158 million increase in wholesale fuel expenses due to higher generation volumes;

PART I

 

A $51$46 million increase in operating and maintenance expenses primarily due to higher maintenance expenses and 2011 storm costs; and

 

A $17$23 million increase in mark-to-market fuel expense on non-qualifying fuel hedge contracts, consisting of mark-to-market losses of $3 million in 2011 compared to gains of $14$20 million in 2010.

PART I

Other Income and Expenses, net. The decrease in 2011 compared to 2010 is primarily attributable to reduced interest income accrued for uncertain income tax positions.

Interest Expense.The decrease was primarily due to reduced interest accrued for uncertain tax positions, post in-service carrying charges related to new projects, and a decrease in debt balances in 2011 compared to 2010.

Income Tax Expense.The increase in income Income tax expense for the sixnine months ended JuneSeptember 30, 2011, decreased compared to the same period in the prior year is primarily due to an increase in pre-tax income and an increase in the effective tax rate.2010. The effective tax rate in 2011 was 30.4% as compared to an effective tax rate for the same period innine months ended September 30, 2011 and 2010 of (4.3)was 36.9% and (32.6)%., respectively. The changeincrease in the effective tax rate is primarily due to a $677 million non-deductible impairment of goodwill in 2010, as discussed above.

Matters Impacting Future Duke Energy Ohio Results

Duke Energy Ohio evaluates the carrying amount of its recorded goodwill for impairment on an annual basis as of August 31 and performs interim impairment tests if a triggering event occurs that indicates it is more likely than not that the fair value of a reporting unit is less than its carrying value. For further information on key assumptions that impact Duke Energy Ohio’s goodwill impairment assessments, see Critical Accounting Policy for Goodwill Impairment Assessments in Duke Energy Ohio’s Annual Report on Form 10-K for the year ended December 31, 2010. In the second quarter of 2010, Duke Energy Ohio recorded a goodwill impairment charge of $216 million related to the Ohio T&D reporting unit to write down the goodwill to its implied fair value. Subsequent to this impairment charge, the carrying value of goodwill associated with the reporting unit is $746 million. Management is continuing to monitor the impact of current market and economic events to determine if it is more likely than not that the carrying value of the Ohio T&D reporting unit has been impaired. Should any such triggering events or circumstances occur in 2011 that would more likely than not reduce the fair value of the Ohio T&D reporting unit below its carrying value, management would again perform an interim impairment test of the Ohio T&D goodwill and it is possible that a goodwill impairment charge could be recorded as a result of this test. Potential circumstances that could have a negative effect on the fair value of the Ohio T&D reporting unit include additional declines in load volume forecasts, changes in the WACC and the equity valuations of peer companies, changes in the timing and/or recovery of and on investments in SmartGrid technology, and the success of future rate case filings.

Duke Energy Ohio operates under an ESP that expires on December 31, 2011. On June 20, 2011, Duke Energy Ohio filed for approval of its next SSOStandard Service Offer (SSO) to replace the existing ESP. The filing seeks approval ofOn October 24, 2011, Duke Energy Ohio and most intervenors, including the PUCO Staff, entered into a settlement stipulation. If approved by the PUCO, the stipulation would establish an ESP that would lastwith competitive auctions for a term of nine yearsJanuary 1, 2012 through May 31, 2015. The stipulation also includes a provision for a non-bypassable stability charge of $110 million per year to be collected from 2012 through 2014 and five months. The ESP would unbundle generation service by separating capacity (physical assets) from energy (actual output). The capacity component would be paid by all customers through an unavoidable charge, adjusted on an annual basis, with all customers sharing in the net profits fromrequires Duke Energy Ohio’s sale of energy and ancillary services.Ohio to transfer its generation assets to a non-regulated affiliate at net book value on or before December 31, 2014. The energy component would be procured through a competitive bidding process and would be avoidable by customers who choose alternative suppliers. The capacity charge would provide for a return of andstipulation requests that the PUCO approve the settlement on investment inor before November 15, 2011, to allow Duke Energy Ohio’s generation assets andOhio to conduct auctions to serve SSO customers effective January 1, 2012. A hearing on the cost to acquire capacity to meet reserve margin requirements. Hearings for this filing are scheduled to begin in September 2011.stipulation was held on November 3, 3011. Duke Energy Ohio’s earnings after the expiration of the current ESP could be significantly different than its historical earnings.

The majority of Duke Energy Ohio’s gas-fired non-regulated generation assets earn capacity revenues from PJM. PJM capacity prices are determined through an auction process for planning years from June through May of the following year and are conducted approximately three years in advance of the capacity delivery period. Capacity prices for periods beginning June 2011 and continuing through May 2014 will be significantly lower than current and historical capacity prices. As a result, Duke Energy Ohio’s operating revenues and EBIT will be negatively impacted through 2014.

On July 6, 2011, the EPA issued the Cross-State Air Pollution Rule (CSAPR) which replaces the Clean Air Interstate Rule (CAIR). See Note 5, “Commitments and Contingencies,” to the Consolidated Financial Statements for a discussion of this rule. Duke Energy Ohio is currently evaluating the effect of the rule on the carrying value of emission allowances held by Commercial Power. Based on the provisions of the CSAPR, Duke Energy Ohio expects to have more SO2 allowances than will be needed to comply with the continuing Clean Air Act (CAA) acid rain cap-and-trade program (excess emission allowances). Duke Energy Ohio expects to incur a pre-tax impairment of approximately $80 million in the third quarter of 2011 to write down the carrying value of excess emission allowances held by Commercial Power to fair value. This current estimate is based on the total allowances held by Commercial Power for compliance under the continuing CAA acid rain cap-and-trade program as of June 30, 2011.

PART I

Duke Energy Indiana

INTRODUCTION

Management’s Discussion and Analysis should be read in conjunction with Duke Energy Indiana’s Unaudited Condensed Consolidated Financial Statements.

Duke Energy Indiana is a wholly-owned subsidiary of Cinergy, which is a wholly-owned subsidiary of Duke Energy. Duke Energy Indiana is an electric utility company that generates, transmits, distributes and sells electricity in north central, central and southern Indiana.

BASIS OF PRESENTATION

The results of operations and variance discussion for Duke Energy Indiana is presented in a reduced disclosure format in accordance with General Instruction H(2) of Form 10-Q.

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011   2010   Increase
(Decrease)
   2011   2010   Increase
(Decrease)
 
  (in millions)   (in millions) 

Operating revenues

  $1,279    $1,189    $90    $1,997    $1,883    $114  

Operating expenses

   1,040     959     81     1,800     1,504     296  
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income

   239     230     9     197     379     (182

Other income and expenses, net

   44     32     12     70     51     19  

Interest expense

   70     67     3     104     99     5  
  

 

   

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   213     195     18     163     331     (168

Income tax expense

   69     68     1     50     112     (62
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income

  $144    $127    $17    $113    $219    $(106
  

 

   

 

   

 

   

 

   

 

   

 

 

The $17$106 million increasedecrease in Duke Energy Indiana’s net income for the sixnine months ended JuneSeptember 30, 2011, compared to JuneSeptember 30, 2010, was primarily due to the following factors:

Operating Revenues.The increase was primarily due to:

 

A $51$72 million increase in fuel revenues (including the ridersrider for emission allowances) primarily due to an increase in fuel rates as a result of higher fuel and purchased power costs; and

 

A $37$40 million net increase in rate riders forprimarily related to the Edwardsport IGCC plant that is currently under construction and higher recoveries of demand side management (DSM)DSM costs.

Partially offsetting these increases was:

An $11 million decrease in retail revenues related to less favorable weather conditions in 2011 compared to 2010.

Operating Expenses.The increase was primarily due to:

 

A $52$178 million increase due to an additional impairment charge related to the Edwardsport IGCC plant that is currently under construction. See Note 4 to the Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters,” for additional information;

PART I

A $66 million increase in fuel costs primarily due to an increase in fuel rates as a result of higher fuel and purchased power costs;

 

An $11 million increase in depreciation and amortization expense primarily due to higher amortization of DSM regulatory assets and increase in production plant base; partially offset by lower amortization of deferred clean coal costs and software;

A $10$27 million increase in operation and maintenance costs primarily due to higher storm related costs and power delivery costs,increased legal and corporate allocations, partially offset by decreased costs associated with the 2010 voluntary severance plan and the consolidation of certain corporate office functions from the Midwest to Charlotte, North Carolina;

A $16 million increase in depreciation and amortization expense primarily due to higher amortization of DSM regulatory assets and increase in production plant base; and

 

An $8A $10 million increase in general taxes primarily due to certain property tax true-ups, higher property tax rates in 2011, and increases in gross receipts and payroll taxes.

Other Income and Expenses, net.The increase in 2011 compared to 2010 was primarily attributable to increased AFUDC in 2011 for additional capital spending related to the Edwardsport IGCC plant that is currently under construction.

Income Tax Expense.The increase in income Income tax expense for the sixnine months ended JuneSeptember 30, 2011, decreased compared to the same period in the prior year was2010 primarily due to an increasea decrease in pre-tax income.income and the effective tax rate. The effective tax rate was 32.3% as compared to an effective tax rate of 34.9% for the same period in 2010.nine months ended September 30, 2011 and 2010 was 30.8% and 33.8%, respectively. The decrease in the effective tax rate is primarily due to an increase in AFUDC equity.

Matters Impacting Future Duke Energy Indiana Results

See Note 4 to the Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters,” for a discussion of the significant increase in the estimated cost of the 618 MW IGCC plant at Duke Energy Indiana’s Edwardsport Generating Station. Additional updates to the cost estimate could occur through the completion of the plant in 2012.

Duke Energy Indiana plans to file a rate case in 2012. This planned rate case is needed to recover investments in Duke Energy Indiana’s ongoing infrastructure modernization projects and operating costs. Duke Energy Indiana’s earnings could be adversely impacted if any of this rate case is denied or delayed by the Indiana Utility Regulatory Commission.

PART I

 

LIQUIDITY AND CAPITAL RESOURCES

The following discussion of liquidity and capital resources is on a consolidated Duke Energy basis. Duke Energy’s significant cash requirements are largely due to the capital intensive nature of its operations, including capital expansion projects, fleet modernization and other expenditures for environmental compliance. Duke Energy relies upon its cash flows from operations, as well as its ability to access the long-term debt and equity capital markets for sources of liquidity. Additionally, Duke Energy has access to unsecured revolving credit facilities, which are not restricted upon general market conditions, as discussed further below.

Operating Cash Flows

Net cash provided by operating activities was $1,717$3,027 million for the sixnine months ended JuneSeptember 30, 2011 compared to $2,124$3,661 million for the same period in 2010, a decrease in cash provided of $407$634 million. This change was driven primarily by:

 

Traditional working capital decreased cash provided from operations $430$560 million, primarily due to an increase in coal inventory.

Investing Cash Flows

Net cash used in investing activities was $1,838$3,070 million for the sixnine months ended JuneSeptember 30, 2011 compared to $2,508$3,525 million for the same period in 2010, a decrease in cash used of $670$455 million. This change was driven primarily by:

 

A $500$520 million decrease in capital and investment expenditures and

 

A $100 million cash inflow in 2011 primarily as a result of the sale of Windstream Corp. stock received in conjunction with the sale of Q-Comm Corporation in December 2010.2010, partially offset by

A $130 million increase in purchases of available-for-sale securities, net of proceeds from sales.

Financing Cash Flows and Liquidity

Net cash used inprovided by financing activities was $187$405 million for the sixnine months ended JuneSeptember 30, 2011 compared to $148$130 million for the same period in 2010, an increase in cash usedprovided of $39$275 million. This change was driven primarily by:

 

A $100$520 million increase in proceeds from net issuances of notes payable and commercial paper, partially offset by

A $200 million decrease in proceeds from the issuance of common stock primarily related to the Dividend Reinvestment Plan, due to the discontinuance of new share issuances in the first quarter of 2011, and other internal plans and

 

A $20$40 million increase in dividend payments, partially offset by

An $80 million increase in proceeds from net issuances of notes payable and commercial paper.payments.

Significant Financing Activities.Activities. Duke Energy issues shares of its common stock to meet certain employee benefit and long-term incentive obligations. Beginning in the first quarter of 2011, Duke Energy discontinued issuing authorized but unissued shares of common stock to fulfill obligations under its DRIP and other internal plans, including 401(k) plans.

In April 2011, Duke Energy filed a registration statement (Form S-3) with the Securities and Exchange Commission (SEC) to sell up to $1 billion (maximum of $500 million of notes outstanding at any particular time) of variable denomination floating rate demand notes, called PremierNotes. The Form S-3 states that no more than $500 million of the notes will be outstanding at any particular time. The notes are offered on a continuous basis and bear interest at a floating rate per annum determined by the Duke Energy PremierNotes Committee, or its designee, on a weekly basis. The interest rate payable on notes held by an investor may vary based on the principal amount of the investment. The notes have no stated maturity date, but may be redeemed in whole or in part by Duke Energy at any time. The notes are non-transferable and may be redeemed in whole or in part at the investor’s option. Proceeds from the sale of the notes will be used for general corporate purposes. The balance as of September 30, 2011, is $30 million. The notes reflect a short-term debt obligation of Duke Energy and are reflected as Notes payable on Duke Energy’s Condensed Consolidated Balance Sheets.

In May 2011, Duke Energy Carolinas issued $500 million principal amount of first mortgage bonds, which carry a fixed interest rate of 3.90% and mature June 15, 2021. Proceeds from this issuance will bewere used to fund capital expenditures and for general corporate purposes.

In August 2011, Duke Energy issued $500 million principal amount of senior notes, which carry a fixed interest rate of 3.55% and mature September 15, 2021. Proceeds from the issuance will be used to repay a portion of Duke Energy’s commercial paper as it matures, to fund capital expenditures in Duke Energy’s unregulated businesses in the United States (U.S.) and for general corporate purposes.

In the third quarter of 2011, Duke Energy issued an additional $450 million in Commercial Paper. Proceeds from this issuance were used for general corporate purposes,

At September 30, 2011, Duke Energy had $1.5 billion classified as Current maturities of long-term debt on the Condensed Consolidated Balance Sheets. These are principally comprised of $750 million, maturing in January 2012, at Duke Energy Carolinas, and $500 million, maturing in September 2012 at Duke Energy Ohio. At December 31, 2010, these notes were classified as Long-term Debt on Duke Energy Carolinas’ and Duke Energy Ohio’s Condensed Consolidated Balance Sheets. Duke Energy Carolinas and Duke Energy Ohio currently anticipate satisfying these obligations with proceeds from additional borrowings.

Available Credit Facilities and Restrictive Debt Covenants.Covenants.The total capacity under Duke Energy’s master credit facility, which expires in June 2012, is $3.14 billion. The credit facility contains an option allowing borrowing up to the full amount of the facility on the day of initial expiration for up to one year. Duke Energy, anticipates that it will begin the process of negotiating a renewal of the master credit facility in the third quarter of 2011. Duke Energy, Duke Energy Carolinas, Duke Energy Ohio, including Duke Energy Kentucky, and Duke Energy Indiana (collectively referred to as the borrowers), each have borrowing capacity under the master credit facility up to specified sub limits for each borrower. However, Duke Energy has the unilateral ability at any time to increase or decrease the borrowing sub limits of each borrower, subject to per borrowera maximum cap limitations, at any time.sub limit for each borrower. See the table below for the borrowing sub limits for each of the borrowers as of JuneSeptember 30, 2011. The amount available under the master credit facility has been reduced, as indicated in the table below, by the use of the master credit facility to backstop the issuances of commercial paper, letters of credit and certain tax-exempt bonds. As indicated, borrowing sub limits for the Subsidiary Registrants are also reduced for amounts outstanding under the money pool arrangement.

PART I

 

Master Credit Facility Summary as of JuneSeptember 30, 2011 (in millions)(a)(b)

 

  Duke Energy Duke Energy
Carolinas
 Duke Energy
Ohio
 Duke Energy
Indiana
 Total 
  Duke Energy Duke Energy
Carolinas
 Duke Energy
Ohio
 Duke Energy
Indiana
 Total 

Facility Size(c)

  $1,097   $840   $750   $450   $3,137    $1,097   $840   $750   $450   $3,137  

Less:

            

Notes Payable and Commercial Paper(d)

   —   ��  (300  —      (150  (450   (450  (300  —      (150  (900

Outstanding Letters of Credit

   (28  (7  (27  —      (62   (46  (7  (27  —      (80

Tax-Exempt Bonds

   (25  (95  (84  (81  (285   (25  (95  (84  (81  (285
                  

 

  

 

  

 

  

 

  

 

 

Available Capacity

  $1,044   $438   $639   $219   $2,340    $576   $438   $639   $219   $1,872  
                  

 

  

 

  

 

  

 

  

 

 

 

(a)This summary only includes Duke Energy’s master credit facility and, accordingly, excludes certain demand facilities and committed facilities that are insignificant in size or which generally support very specific requirements, which primarily include facilities that backstop various outstanding tax-exempt bonds. These facilities that backstop various outstanding tax-exempt bonds generally have non-cancelable terms in excess of one year from the balance sheet date, such that the Duke Energy Registrants have the ability to refinance such borrowings on a long-term basis. Accordingly, such borrowings are reflected as Long-term Debt on the Condensed Consolidated Balance Sheets of the respective Duke Energy Registrant.
(b)Credit facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65% for each borrower.
(c)Represents the sub limit of each borrower at JuneSeptember 30, 2011. The Duke Energy Ohio sub limit includes $100 million for Duke Energy Kentucky.
(d)Duke Energy issued $450 million of Commercial Paper and loaned the proceeds through the money pool to Duke Energy Carolinas and Duke Energy Indiana. The balances are classified as long-term borrowings within Long-term Debt in Duke Energy Carolina’s and Duke Energy Indiana’s Condensed Consolidated Balance Sheets. Duke Energy issued an additional $450 million of Commercial Paper in the third quarter of 2011. The balance is classified as Notes payable and commercial paper on Duke Energy’s Condensed Consolidated Balance Sheets.

Duke Energy began negotiating a replacement of its master credit facility in October 2011. Duke Energy expects to execute a new five-year, $6 billion master credit facility in the fourth quarter of 2011, with $4 billion available at closing and the remaining $2 billion available on or soon after the closing of the proposed merger with Progress Energy, Inc. (Progress Energy). The master credit facility will include borrowing sub limits for certain subsidiaries, including Progress Energy subsidiaries, similar to the current facility.

Restrictive Debt Covenants.The Duke Energy Registrants’ debt and credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of JuneSeptember 30, 2011, each of the Duke Energy Registrants was in compliance with all covenants related to its significant debt agreements. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. None of the significant debt or credit agreements contain material adverse change clauses.

Other Issues

Global Climate Change and Other Environmental Protection Agency (EPA) Regulations Recently Published and Under Development.

The EPA has issued and is in various stages of developing several non-greenhouse gas (non-GHG) environmental regulations that will affect the Duke Energy registrants,Registrants, including the final Cross-State Air Pollution Rule (previously referred to as the Transport Rule)(CSAPR), and proposed regulations for coal combustion residuals, cooling water intake structures under the Clean Water Act 316(b) and Utility Boiler Maximum Achievable Control Technology (MACT) emission standards.standards for hazardous air pollutants. As a group, these final and proposed non-GHG environmental regulations will require the Duke Energy Registrants to install additional environmental controls and may result in the accelerated retirement of some coal-fired units. While the ultimate regulatory requirements for the Duke Energy Registrants from the EPA’s regulatory actions will not be known until all the rules have been finalized, for planning purposes, the Duke Energy Registrants currently estimate the cost of new control equipment that may need to be installed to comply with this group of rules could total $5 billion to $6 billion over the next 10 years. The Duke Energy Registrants may curtail generation from its plants and also expectsexpect to incur incrementalincreased fuel, purchased power, operation and operation, maintenance, and other expenses in conjunction with the non-GHG EPA regulations. In addition to the planned retirements associated with new generation the Duke Energy Registrants are constructing, the Duke Energy Registrants are evaluating the need to retire additional coal fired generating capacity if it is not economic to bring it into compliance with the EPA’s regulations;regulations. Total, planned and additional retirements could total as much as 3,200exceed 3,300 MWs of coal-fired generating capacity. Until the final regulatory requirements are known and can be fully evaluated, the potential compliance costs associated with these EPA regulatory actions are subject to considerable uncertainty. Therefore, the actual compliance costs incurred and MWMWs to be retired may be materially different from these estimates based on the timing and requirements of the final EPA regulations.

For further information on global climate change and other EPA regulations under development and the potential impacts on Duke Energy, see “Other Issues” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010.2010 and Note 5 to the Unaudited Condensed Consolidated Financial Statements, “Commitments and Contingencies”.

Merger with Progress Energy Inc. See Note 3 to the Unaudited Condensed Consolidated Financial Statements, “Acquisitions and Dispositions”Sales of Other Assets” for information related to Duke Energy’s pending merger with Progress Energy, Inc.Energy.

Nuclear Matters. In March 2011, a magnitude 9.0 earthquake and subsequent tsunami caused significant damage at the Fukushima Daiichi nuclear power station in northeast Japan. As a result, a Nuclear Regulatory Commission (NRC) special task force initiated a comprehensive review of processes and regulations to determine whether the agency should make additional improvements to the nuclear regulatory system. The Institute of Nuclear Power Operations (INPO) is leading United StatesU.S. nuclear industry reviews of the Fukushima Daiichi event, and additional reviews by other national and international organizations are ongoing or expected. Such reviews may impact future operations and/or capital requirements at U.S. nuclear facilities, including those owned by Duke Energy Carolinas. These events could also cause increased regulatory review and scrutiny by the NRC which could lead to delays in the process for obtaining required regulatory approvals. See Item 1A, “Risk Factors”, in the 2010 Form 10-K for further discussion of applicable risk factors.

Off-Balance Sheet Arrangements

The following discussion of off-balance sheet arrangements and contractual obligations is on a consolidated Duke Energy basis.

Off-Balance Sheet Arrangements

During the sixnine months ended JuneSeptember 30, 2011, there were no material changes to Duke Energy’s off-balance sheet arrangements. For information on Duke Energy’s off-balance sheet arrangements, see “Off-Balance Sheet Arrangements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010.

PART I

Contractual Obligations

Duke Energy enters into contracts that require cash payment at specified periods, based on specified minimum quantities and prices. During the sixnine months ended JuneSeptember 30, 2011, there were no material changes in Duke Energy’s contractual obligations. For an in-depth discussion of Duke Energy’s contractual obligations, see “Contractual Obligations” and “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010.

PART I

New Accounting Standards

The following new Accounting Standards Updates (ASU) have been issued, but have not yet been adopted by Duke Energy, as of JuneSeptember 30, 2011:

ASC 820—Fair Value Measurements and Disclosures (ASC 820).In May 2011, the FASB amended existing requirements for measuring fair value and for disclosing information about fair value measurements. This revised guidance results in a consistent definition of fair value, as well as common requirements for measurement and disclosure of fair value information between U.S. GAAP and International Financial Reporting Standards (IFRS). In addition, the amendments set forth enhanced disclosure requirements with respect to recurring Level 3 measurements, nonfinancial assets measured or disclosed at fair value, transfers between levels in the fair value hierarchy, and assets and liabilities disclosed but not recorded at fair value. For the Duke Energy Registrants, the revised fair value measurement guidance is effective on a prospective basis for interim and annual periods beginning January 1, 2012. Duke Energy is currently evaluating the potential impact of the adoption of this revised guidance and is unable to estimate at this time the impact of adoption on its consolidated results of operations, cash flows, or financial position.

ASC 220—Comprehensive Income (ASC 220).In June 2011, the FASB amended the existing requirements for presenting comprehensive income in financial statements primarily to increase the prominence of items reported in other comprehensive income (OCI) and to facilitate the convergence of U.S. GAAP and IFRS. Specifically, the revised guidance eliminates the option currently provided under existing requirements to present components of OCI as part of the statement of changes in stockholders’ equity. Accordingly, all non-owner changes in stockholders’ equity will be required to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. For the Duke Energy Registrants, this revised guidance is effective on a retrospective basis for interim and annual periods beginning January 1, 2012. Early adoption of this revised guidance is permitted. Duke Energy is currently evaluating the revised requirements for presenting comprehensive income in its financial statements and is unable to estimate at this time the impact of adoption of this revised guidance on its consolidated results of operations, cash flows or financial position.

Subsequent Events

For information on subsequent events related to acquisitions and sales of other assets, regulatory matters, commitments and contingencies, debt and intangibles,credit facilities, and severance, see Note 3, “Acquisitions and Sales of Other Assets,” Note 4, “Regulatory Matters,” Note 5, “Commitments and Contingencies,” Note 6, “Debt and Credit Facilities,” Note 9, “Fair Value of Financial Assets and Liabilities,” and Note 7, “Goodwill, Intangible Assets and Impairments,15, “Severance,” to the Unaudited Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes from the disclosures presented in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010. For an in-depth discussion of Duke Energy’s market risks, see “Management’s Discussion and Analysis of Quantitative and Qualitative Disclosures about Market Risk” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures. – Duke Energy, Duke Energy Carolinas, Duke Energy Ohio, Duke Energy Indiana

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Duke Energy Registrants in the reports they file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commission’s (SEC) rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Duke Energy Registrants in the reports they file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Duke Energy Registrants have evaluated their effectiveness of their disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of JuneSeptember 30, 2011, and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.

Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Duke Energy Registrants have evaluated changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended JuneSeptember 30, 2011 and have concluded no change has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings.

For information regarding legal proceedings that became reportable events or in which there were material developments in the secondthird quarter of 2011, see Note 4 to the Unaudited Condensed Consolidated Financial Statements, “Regulatory Matters” and Note 5 to the Unaudited Condensed Consolidated Financial Statements, “Commitments and Contingencies” under the heading “Litigation.”

Item 1A.Risk Factors.

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in Duke Energy’s, Duke Energy Carolinas’, Duke Energy Ohio’s and Duke Energy Indiana’s Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect the Duke Energy Registrants’ financial condition or future results.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities for SecondThird Quarter of 2011

There were no issuer purchases of equity securities during the secondthird quarter of 2011.

Item 4.Removed and Reserved.

PART II

Item 6. Exhibits

(a) Exhibits

Exhibits filed or furnished herewith are designated by an asterisk (*).

 

Exhibit

Number

    

Duke Energy

  

Duke Energy
Carolinas

  

Duke Energy
Ohio

  

Duke Energy
Indiana

 
*12  Computation of Ratio of Earnings to Fixed Charges  X     
*31.1  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  X     
*31.2  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  X     
*31.3  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X    
*31.4  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X    
*31.5  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    X   
*31.6  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    X   
*31.7  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     X  
*31.8  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     X  
*32.1  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  X     
*32.2  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  X     
*32.3  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X    
*32.4  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X    
*32.5  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    X   
*32.6  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    X   

PART II

Exhibit

Number

Duke EnergyDuke Energy
Carolinas
Duke Energy
Ohio
Duke Energy
Indiana
*32.7  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     X  
*32.8  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     X  
*101  Financials in XBRL Format.  X    X    X    X  

The total amount of securities of the registrant or its subsidiaries authorized under any instrument with respect to long-term debt not filed as an exhibit does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission (SEC), to furnish copies of any or all of such instruments to it.

PART II

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

 

 

DUKE ENERGY CORPORATION

DUKE ENERGY CAROLINAS, LLC

DUKE ENERGY OHIO, INC.

DUKE ENERGY INDIANA, INC.

Date: AugustNovember 8, 2011 

/S/    LYNN J. GOOD        

 

Lynn J. Good

Chief Financial Officer

Date: AugustNovember 8, 2011 

/S/    STEVEN K. YOUNG        

 

Steven K. Young

Senior Vice President and Controller

 

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